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DEPRECIATION  CHARGES 

OF  RAILROADS  AND 

PUBLIC  UTILITIES 


A  MEMORANDUM  FILED  WITH 
THE  DEPRECIATION  SECTION 
OF  THE  BUREAU  OF  ACCOUNTS 
OF  THE  INTERSTATE  COM- 
MERCE COMMISSION 


By 

ROBERT  A.  CARTER, 

Chairman  of  the  Committee  on  Rate 

Fundamentals  of  the  American 

Gas  Association;  and 

WILLIAM  L.  RANSOM, 
of  the  New  York  Bar. 


A.  W.  Stevens,  Printer,  300  Wash'n  St.,  Bklyn.,  N.  Y.  —  Main  2300. 


IXDEX 

PAGE 

Reasons  for  Interest  in  Subject 1 

Effect  of  Increased  Eailroad  Rates  on 
Costs  of  Utility  Service  in  New  York 
City 2-5 

Pertinent    Provisions    of    the    Interstate 

Commerce  Act  5-7 

Purposes  of  the  Statute  Analyzed 7.-9 

Nature  of  *' Depreciation  Charges^'  as  to 

Railway  Property 9-14 

The    Sound    Treatment    of   **  Retirement 

Expense'' 14-18 

xlnalysis  of  the  ** Depreciation  Charges'' 

of  Railway  Carriers  Since  1912 18-23 

Concrete    Recommendations    as    to    the 

Handling  of  ** Depreciation  Charges"     23-24 

The  Two  Opposing  Views  as  to  Provisions 

for  the  Upkeep  of  Property 24-26 

Decisions  of  the  Courts  and  Regulatory 
Commissions  Concerning  These  Op- 
posing Views  26 

The  New   York  S   Queens  Gas  Co, 

Case 26-32 

Consolidated  Gas  Co.  vs.  Newton  (267 

Fed.  231)  32-36 

N 

The  Nashville,  C.  'S  St.  L.  By.  Co. 

Case 36-43 


^50473 


II 

PAGE 

Basis   of   the    1920    Grant    of   Increased 

Freight  Eates    43-45 

The  Knoxville  Water  Co.  Case 45-46,48-57 

The  Minnesota  Rate  Case 46-48 

The  Kansas  City  Southern  Ry.  Co.  Case.. 

56-58,  92-93 

The  First  Consolidated  Gas  Co.  Rate  Case     58-63 

California  and  Oklahoma  Decisions  Cited 

as  Adverse  Authority 70-73 

Essential  Purposes  of  the  Statute  and  the 
Relation  of  ^^Depreciation  Charges'' 
Thereto .....< 73-74 

Reasons  Why  the  Cost  of  Retirements 
Should  Not  Be  Anticipated  Through 
Accruals  Based  on  **Life  Tables''. . .     74-76 

Concrete  Illustration  of  the  Reasons  Why 
the  Rate   Should  Not   Be  Burdened 
With    Charges   Anticipating    Future 
Retirements 76-80 

Other  Decisions  of  Courts  and  Commis- 
sions    92-101 

Summary  of  Conclusions  From  the  Fore- 
going Decisions   101-102 

Basic  Objections  to  the  ^^  Accrued  Depre- 

;      ciation"  Theory 102-105 

The  Brooklyn  Borough  Gas  Co.  Case  and 

Other  Recent  New  York  Rulings 105-107 

In  Conclusion 107-108 


nao  EAST  :fifxeent-H  sijreet 

-New    York    City. 

vChief  vof  -the  Depreciatiotn  Section, 
bureau  of  AccouiLts, 

Interstate  Commerce  CommissioJi^ 
WasJainglan,  D,  CL 

Tkm  imemorandnm,  m  letter  form,  is  submitted 
Iby  way  of  compliance  with  your  courteous  com- 
imimication  ;o<f  Marcli  2,  19-21,  in  wliich  you  stated 
that  for  the  purposes  of  the  investi:gati0ns  pre- 
liminary txD  the  performance  of  the  duties  de- 
volved upon  the  Interstate  Commerce  Commission 
iby  Section  20  of  the  Interstate  Comm^roe  Act  as 
amended,  the  Bureau  of  Accounts  will  foe  glad  to 
receive  an  informal  submission  of  the  views  of 
those  especially  interested  in  the  subject  of  depre- 
ciation. I  have  asked  Ex-Justice  William  L.  Ean- 
som,  of  counsel  for  some  of  the  companies  in 
which  I  am  interested,  to  co-operate  with  me  in 
the  preparation  of  this  memorandum,  particularly 
in  so  far  as  it  deals  with  the  construction  of  stat- 
utes and  the  decisions  of  Courts  and  regulatory 
tribunals. 

First  let  me  say  a  word  as  to  my  reasons  for 
interest  in  this  subject,  to  which  I  have  devoted 
thought  and  study  for  many  years.  My  interest 
in  the  subject  is  neither  academic  nor  speculative. 
Consideration  of  its  practical  aspects  is  forced 
upon  me  by  the  incidents  of  almost  every  day  of 
my  business  activity.  Error  on  the  part  of  the 
Interstate  Commerce  Commission,  in  making  the 
classifications  and  regulatory  requirements  speci- 
fied in  paragraph  5  of  Section  20  of  the  Inter- 


•}  *^ 


state  Commerce  Act  as  amended,  would  have  seri- 
ous consequences,  both  to  the  many  investors  in 
the  companies  of  which  I  am  an  executive  or  di- 
rector, and  to  the  many  patrons  whom  those  com- 
panies desire  to  serve  economically  and  w^ell. 

The  companies  with  which  I  am  connected 
furnish  heat,  light,  fuel  and  power  for  the  daily 
requirements  of  many  millions  of  people.  The 
total  quantity  of  gas  sold  by  the  Consolidated 
Gas  Company  and  its  affiliated  companies  in  1919 
was  33,674,972,000  cubic  feet.  Its  affiliated  electric 
companies  sold  in  1919,  865,388,322  kilowatt  hours 
of  electric  energy.  As  of  April,  1920,  the  total 
number  of  customers  relying  upon  the  Consoli- 
dated Gas  Company  and  its  affiliated  gas  and 
electric  companies  for  their  needs  for  heat, 
light,  fuel  and  power,  was  1,409,774.  Families 
depend  on  gas  and  electricity  for  cooking,  heating, 
lighting  and  other  domestic  uses;  included  in  the 
list  of  consumers  are  countless  factories,  shops, 
hotels,  stores,  theaters,  and  other  industrial  and 
commercial  enterprises,  upon  which  several  mil- 
lions of  people  depend  directly  for  livelihood.  The 
industrial  and  commercial  success  of  the  splendid 
territory  served  by  these  companies  demands  the 
furnishing  of  good  service  at  the  lowest  rates  con- 
sistent with  the  maintenance  of  that  quality  of 
service  and  the  earning  of  a  fair  return  on  the  cap- 
ital investment.  It  is  not  too  much  to  say  that  the 
furnishing  of  gas  and  electric  energy  in  adequate 
quantities  and  at  rates  no  higher  than  necessary 
for  the  defraying  of  operating  expenses  and  the 
earning  of  a  reasonable  return  upon  the  invested 
capital,  is  probably  the  single  service  most  essen> 
tial  to  the  convenience,  comfort,  health  and  life 
of  the  inhabitants  of  the  City  of  New  York  and 
adjacent  territory  served  by  these  companies,  and 
to  the  continuance  and  prosperity  of  the  business 
enterprises  carried  on  therein. 


We  desire  greatly,  in  the  first  place,  to  furnish 
an  efficient  and  acceptable  service  to  all  our  con- 
sumers and  patrons,  and,  in  the  second  place,  to 
charge  them  a  rate  no  higher  than  is  absolutely 
necessary  to  reimburse  us  for  operating  expendi- 
tures actually  made,  and  yield,  in  addition,  a  fair 
return  on  our  actual  investment  as  judicially  es- 
tablished. We  adhere  to  that  standard  in  the  fixa- 
tion of  the  rates  charged  by  our  companies;  we 
desire  that  railroads  and  regulated  utilities  whose 
service  we  require  in  the  carrying  on  of  our  busi- 
ness, shall  do  the  same  thing.  The  amount  of 
money  which  we  have  to  pay  out  for  freight  rates 
becomes  a  large  item  in  our  operating  costs ;  and 
we,  in  turn,  as  patrons  of  railway  service,  do  not 
wish  to  pay  excessive  rates  or  rates  inflated  by 
fictitious  charges,  in  the  guise  of  operating  ex- 
penses or  anything  else. 

In  the  production  of  these  great  quantities  of 
gas  and  electric  energy  and,  to  a  lesser  extent,  in 
transmitting  the  same  from  the  manufacturing 
and  generating  plants  to  the  premises  of  myriad 
consumers,  there  is  required  the  consumption  and 
use  of  vast  quantities  of  coal,  oil  and  other  mate- 
rials, all  of  which  coal,  and  a  large  part  of  which 
other  materials  are  necessarily  transported  for 
greater  or  lesser  distances  over  the  lines  of  rail- 
road common  carriers  operating  in  interstate  com- 
merce within  the  boundaries  of  the  United  States, 
for  which  transportation  the  Consolidated  Gas 
Company  and  its  affiliated  gas  and  electric  com- 
panies pay  annually  large  and  increasing  sums  of 
money  in  freight  charges,  the  total  of  such  charges 
paid  by  them  and  charged  to  their  operating  ex- 
penses amounting,  on  coal  alone,  during  the  year 
1919,  to  not  less  than  $3,967,422.00,  and  to  a  sub- 
stantially greater  sum  in  1920.  During  the  calen- 
dar year  1919  there  were  delivered  by  rail  trans- 


4*. 


jrortatibn  798,937' gross  tons  of  coal!  to^  tliese'  affili^ 
atedi  gas  companies-  and.  1,008^312.  gross  tons  to> 
tihe  affiliated,  electric  companies,  a  total  of.  more* 
than;  1,800,000.  tons  of  coal,  all  of  which,  wasi usedl 
in  the  generation: and. distribution  of  gas  andi elec- 
tricity during  19I9.\  The  quantity  usedi  im  1920) 
amounted.to.more  than; 2,200,000  tons.  By  reasoni 
of  the  foregoing,  the  gas  andl  electric  industry 
conducted. by  the  Consolidated! Gas. Company  and' 
its  affiliated!  companies-  has  been:  and!  is-  one  of 
the  largest,  patrons  of  rmlroad!  transportation  ini 
the  United;  Stiates;. 

In  the  const!ruction"of  new.  plant;  the  installation; 
of  additions: to.  apparatus  and! equipment,  the  re- 
pair and! upkeep  of.  structures  and!  apparatus,  the', 
making  of  replacements  and  extiensions  of.  the  dis- 
ttributing  systiBms,-  andithe  Hke,  there  is  required! 
the  use  of.  large  quantities  of  brick,  cement;  steel,, 
brass-work,  iron'  pipe,'  and!  other  matierials,  uponi 
which,  the  freight  charges  amount,  to- many  thou- 
sands of.  dollars  annually,  which,  freight:  charges; 
add  greatly  to  the  annual. cost  of  the  maintenance,, 
repair  and. upkeep  of  the  properties  of.  these  affib- 
ated.  companies'  in;  their,  continued;  high,  state  of 
operating  efficiency,  and .  add .  substantially  to ;  the  • 
Gost.  off  the.  new  construction,  which,  ini  turn,  be- 
comesa  part  of  the  necessary  investment:  of  the' 
companies  in  property  required :  for  the  carrying 
on  of  the  gas;  and!  electric  business,  upon .  which i 
the  consumers  must  pay  a  rate  yielding  ;a .  fair  re- 
turn '  from  year,  to  year; . 

By  reason'  of  the  effect'  on  both'  our  operating 
expenses  and!  our  required'  investment,  we  feel' 
that  we  are  directly  and' actually  interested  in 
seeing  to  it  that  the  burden  of  the  charges  of  rail- 
road common  carriers  for  the  transportation  of ' 
ooal,  oil,  brick,  cement,  iron,  steel,  pipe  and  other- 
materials  in  i  interstate  commerce,  shall! be  and  be.' 


5 


kept  nt)  greater  than  is  from  time  to  time  reasdii- 
ably  necessary  to  pay  tlie  actual  cost  of  the  rend- 
ering of  adequate  and  efficient  service  by  such 
common  carriers  and  the  maintenance  arid  upkeep' 
fof  their  property  in  first  class  o-perating  condition,, 
and  to^  pay  a  reasonable  return  upon  their  in- 
vested capital.  That  interest  leads'  to  the  prepa-- 
ifation  and  filing  of  tliis'  memorandum.- 

The  Pfertinent  Provision^  oi  thi6  Statute^ 

Turning  tO'  the  particular"  statutory  dnty  of  the' 
Interstate  Commerce  Commission  und^r  discus-- 
sion,  it  may  be  n^ted-  that  S'eeti<^n  15a>  paragraph- 
^  of  the'  Interstate  Commerce  Act,  as'  amended,  re- 
quires that  the  rates  of"  carriers  by  railroad  be  so' 
adgustedi  that  the  saidi  carriers 

u#  *  *  ^Qii^  under  honest,  efficient  and'  eco- 
nomical- management  and  reasonable  expendi-- 
tures  for  maintenance  of  way,  structures  and 
equipment,  earn  an  aggregate  annual-  net  rail- 
way operating  income  eqnal  as  nearly  as  may' 
be  to  a  fair  return  upon  the  aggregate  value' 
of  the  railway  property  of  such  carriers  held- 
for  and.  used-  in  the  service"  of  frarifeporta-- 
tion.''' 

smd'  Paragraph  3^  of  the  same  section  provides- 

*  *  that  during  the  two*  years  beginning  jtfarcli' 
1, 1920,  the  Cbmmigsionshall'take  as  siich  fair 
return  a  sum  equal'  to^  5i^  per  ceriturii  of  such' 
aggregate  value,  but  may,  in  its  discretion, 
add'  thereto*  a  sum'  not  exceeding  oriie-half  of 
one  per  centum'  of  such  aggregate  value  to' 
make^  provision  in"  whole  or  in  part  for  im- 
provements, betterments  or  equipment,  which, 
according  to  the  accounting  system  pre- 
scribed by  the  Commission,  are  chargeable  to ' 
capital:  account ' ' '; ; 


while  Paragraph  1  of  the  same  section  defines  the 
term  *^net  railway  operating  income"  as 

**  railway  operating  income,  including  in  the 
computation  thereof  debits  and  credits  aris- 
ing from  equipment  rents  and  joint  facility 
rents." 

The  term  ** railway  operating  income"  has 
seemed  to  us  to  be  used  in  the  statute  in  obviously 
the  same  sense  as  in  the  accounting  system  pre- 
scribed by  the  Commission;  namely,  to  denote 
any  excess  of  railway  operating  revenues  over 
railway  operating  expenses. 

Section  20,  paragraph  5,  of  the  Interstate  Com- 
merce Act  directs  that 

**The  Commission  shall,  as  soon  as  prac- 
ticable, prescribe,  for  carriers  subject  to  this 
Act,  the  classes  of  property  for  which  de- 
J:  preciation  charges  may  properly  be  included 
under  operating  expenses,  and  the  percent- 
ages of  depreciation  which  shall  be  charged 
with  respect  to  each  of  such  classes  of  prop- 
erty, classifying  the  carriers  as  it  may  deem 
proper  for  this  purpose.  The  Commission 
may,  when  it  deems  necessary,  modify  the 
classes  and  percentages  so  prescribed.  The 
carriers  subject  to  this  Act  shall  not  charge  to 
operating  expenses  any  depreciation  charges 
on  classes  of  property  other  than  those 
prescribed  by  the  Commission,  or  charge  with 
respect  to  any  class  of  property  a  percentage 
other  than  that  prescribed  therefor  by  the 
Y  Commission.  No  such  carrier  shall  in  any 
case  include  in  any  form  under  its  operating 
or  other  expenses  any  depreciation  or  other 
charge  or  expenditure  included  elsewhere  as 
a  depreciation  charge  or  otherwise  under  its 
operating  or  other  expenses.' ' 


Purposes  of  the  Statute  Analyzed 

The  purpose  of  the  prohibition  contained  in  the 
sentence  last  quoted  above  has  seemed  to  us  to 
be  obviously  the  prevention  of  excessive  or  im- 
proper charges  to  expense  accounts  through  du- 
plicated charges,  and  the  purpose  of  the  provi- 
sions respecting  the  so-called  ^*  depreciation 
charges"  is  to  keep  them  within  reasonable 
bounds.  The  necessity  for  strict  scrutiny  and  reg- 
ulation by  the  Commission  in  this  regard  appears 
clearly  when  it  is  considered  that  the  net  rail- 
way operating  income,  which  the  statute  directs 
shall  be  kept  large  enougl^  to  yield  for  the  car- 
riers of  a  rate  district  a  fair  annual  return  on  the 
aggregate  value  of  the  property  devoted  to  rail- 
way service}  is  in  turn  dependent  on  the  railway>^ 
operating  income,  which  is  what  is  left  after  de- 
ducting railway  operating  expenses  from  railway 
operating  revenues>)L  In  order  that  the  schedules 
of  railway  rates  at  a  given  time  in  force  may  not 
wrongly  be  made  to  appear  to  yield  an  insufficient 
net  operating  income,  and  so,  because  of  inflation 
of  the  operating  expense  account,  appear  to  be 
inadequate,  the  Commission  has  now  specifically 
been  given  the  duty,  as  well  as  the  power  and 
jurisdiction,  to  control  the  estimated  charges  for 
^^ depreciation'^  and  the  basis  thereof.  The  im- '^ 
portance  of  this  we  shall  hereinafter  discuss  with 
concrete  references  to  the  so-called  *  depreciation 
reserves''  of  the  carriers.^AVithout  the  possession  *^ 
and  exercise  of  this  power  by  the  Commission, 
any  carrier  would  be  left  in  position  to  include  in 
its  operating  expenses  unnecessary  and  excessive 
charges  under  this  head  and  thus  make  its  reven- 
ues and  rates  appear  inadequate  upon  the  face 
thereof  w^hen  in  fact  they  were  ample  or  more 
than  amplej^ Another  consideration  impelling  the  "^ 
Congress  to  confer  and  the  Commission  to  exer- 


s 

cise  this  power  of  regulation  of  ctorges  bas^ed  on 
estimates  is  no  doubt  to  be  found  in  paragraph  6 
of  Section  15a  of  the  mm&  statute,  which  requires 

that 

* 

^*If  under  the  provisions  of  this  section,  any 
carrier  receives  for  any  year  a  net  railway 
operating  inconxe  in  excess  of  6  per  centum  of 
the  value  of  the  railway  property  held  for  and 
used  by  it  in  the  service  of  transportation, 
one-half  of  such  excess  shall  be  placed  in  a 
reserve  fund  established  and  maintained  by 
•  such  earlier,  and  the  remaining  one-half 
thereof  shall,  within  the  first  four  months  fol- 
lowing the  close  of  the  period  for  which  such 
computation  is  made,  be  recoverable  by  and 
paid  to  the  Commission  for  the  purpose  of  es- 
tablishing and  maintaining  a  general  railroad 
contingent  fund  *   *   *'^ 

and  to  the  further  effect  shown  in  the  statute.  If 
the  carrier  had  been  or  were  left  subject  to  no  con- 
trol in  respect  of  the  charges  which  it  might  make 
to  operating  expenses  for  *  ^  depreciation '  ^  it  might 
easily,  if  such  charges  were  based  on  estimates 
and  were  not  kept  in  close  relationship  to  the  ac- 
tual disbursements,  make  these  estimated  charges 
sufficiently  high  to  create  the  appearance  that  its 
^*net  railway  operating  income"  for  any  year  did 
not  reach  ^  *  six  per  centum  of  the  value  of  the  rail- 
way property  held  for  and  used  by  it  in  the  service 
of  transportation''  and  thus  deprive  the  *^ general 
railroad  contingent  fund''  of  moneys  that  should 
go  into  it  in  accordance  with  the  provisions  and  in- 
tent of  the  statute. 


% 


Nature  of  "Depreciation  Charges"  as  to  Railway 
Property 

In  order  to  determine  what  amounts  may  prop- 
erly be  charged  to  operating  expenses  to  repre- 
sent *  depreciation '^  as  defined  in  the  Act,  and  the 
manner  in  which,  as  a  practical  business  matter, 
this  phase  of  railway  operation  and  management 
should  be  handled,  it  is  necessary  to  bear  in  mind 
the  proper  purpose  of  such  charges.  The  word 
** depreciation,''  as  commonly  used,  has  a  variety 
of  meanings. V.  One  of  the  most  prevalent  is  to  de- 
note a  decline  or  shrinkage  in  exchange  value  or 
market  pricey  That,  however,  is  obviously  not  the 
meaning  intended  by  Congress  to  be  attached  to 
the  word  as  it  is  used  in  the  Interstate  Commerce 
Act.  Changes  in  value  are  matters  of  fact  to  be 
determined  by  observation  and  not  by  rule  pre- 
scribed by  the  Commission.  The  accounts  of  a  "^ 
carrier  must  deal  with  receipts  and  outlays — 
facts,  not  opinions  as  to  variations  in  value  or  as 
to  the  probable  lapse  of  time  before  particular 
units  of  property  will  be  retired  from  use.  The 
railway  property  of  a  carrier  is  held  for  use  and 
not  for  sale;  and  fluctuations  in  its  value,  if  and 
as  they  occur,  do  not  have  any  relation  to  the  car- 
rier's  operating  expenses.  A  merchant  may  prop-'' 
erly  reserve  out  of  his  revenues  sums  to  provide 
against  shrinkage  in  the  value  of  goods  remain- 
ing unsold,  below  their  cost,  for,  until  the  complete 
stock  of  goods  is  sold  and  converted  into  money, 
the  real  profit  or  loss  from  his  venture  cannot  be 
ascertained.  The  rolling  stock,  road-bed  and  '^ 
equipment  of  a  carrier  by  railway  are  not  acquired 
for  sale  like  merchandise ;  they  are  expected  to  be 
operated  forever  in  furnishing  transportation,  or 
at  least  for  an  indefinitely  long  period.  >The  car- 
rier sells  transportation  service  to  its  patrons,  not 
its  railway  'property  piecemeal.    A  railway  system  "^ 


10 


is  composed  almost  entirely  of  tangible  property 
that  could  not  readily,  and  to  a  large  extent  conld 

•^not  economically,  be  converted  to  other  uses.  Its 
ownership  may  change  and  the  price  at  which  the 
transfer  is  effected  may  be  greater  or  less  than 
the  cost  of  the  property  when  installed,  but  it  does 
not  appear  that  the  utility  of  the  property  or  its 
relations  to  the  shippers  and  passengers  using  it 

•^is  thereby  affected.  The  rate  charged  for  the 
transportation  service  does  not  depend  upon  the 
age  of  the  engine,  road-bed,  or  car;  nor  can  it 
properly  be  said  that  the  carrier's  operating  ex- 
penses vary  with  changes  in  the  exchange  value 
of  the  property  or  the  cost  of  reproducing  it  at  a 
particular  time.  As  has  been  said  by  Mr.  George 
N.  Webster  in  a  recent  monograph*  on  the  sub- 
ject : 

'  **The  consideration  of  age  enters  no  more 
into  the  question  of  the  rates  of  a  public  serv- 
ice company,  which  is  able  to  and  does  ren- 
der the  service  it  was  organized  to  render, 
than  does  the  age  of  a  taxicah^  or  of  its  driver, 
or  of  the  clothes  he  ivears,  enter  into  the 
question  of  the  fare.  A  driver  twenty  years 
old  with  a  new  car  and  a  new  uniform  can 
charge  no  more  than  a  man  of  sixty  with  a 
ten-year-old  car  still  operating  efficiently.  It 
is  transportation  the  passenger  is  buying — 
and  he  expects  to  pay  uniformly  for  a  uniform 
service,  regardless  of  the  age  of  the  equip- 
ment. 

^*Nor  does  a  lawyer  or  a  physician  expect 
to  regulate  his  fee  by  the  age  of  his  office 
furniture,  as  one  might  think  he  should  from 
the  arguments  of  the  professional  depreci- 

*Copies  of  Mr.  Webster's  monograph  entitled  "Theoreti- 
cal Depreciation:  A  Menace  to  the  Public  and  the  Inves- 
tor," have  been  reprinted,  and  will  be  furnished  to  anyone 
interested,  on  request  to  the  undersigned. 


11 


ator.  A  laborer  of  twenty  with  a  new  pair 
of  overalls  draws  the  same  rate  per  diem  as 
the  laborer  of  sixty  with  a  pair  of  wornont 
overalls.  Both  do  a  uniform  day's  work  for 
a  miiform  day's  pay  and  age  cuts  no  figure 
so  long  as  uniformity  in  service  capacity 
exists. 

**A  celebrated  lawyer  who  died  within  a 
year  and  who  bequeathed  many  millions  of 
dollars  to  a  great  college  had  in  his  office  the 
simplest  and  oldest  furniture  the  writer  ever 
saw.  Furthermore,  his  earning  capacity  in- 
creased annually  to  the  day  of  his  death  at 
the  age  of  seventy-four.  He  probably  never 
realized  w^hat  a  liar  he  was  making  out  of  the 
professional  depredationist. '' 

y  So  far  as  the  passenger  and  the  shipper,  the 
purchasers  of  raihuay  service,  are  concerned, 
the  essential  thing  is  that  the  system  be  main- 
tained in  efficient  operating  condition  and  that 
its  service  be  rendered  efficiently,  economical- 
ly, and  at  a  fair  price.  Its  operating  expenses 
are  the  out-goes  necessary  to  efficient  and  eco- 

>^omical  operation.  It  has  been  commonly  rec- 
ognized that  in  the  case  of  a  railway  or  other 
public  utility,  the  cost  of  the  maintenance  of  the 
property  in  efficient  and  economical  operating 
condition,  through  adequate  repairs  of  wearing 
parts  and  through  the  renewal  and  replacement 
of  units  retired  from  use  for  any  cause,  is  a  proper 
charge  against  the  cost  of  rendering  the  service 
as  represented  by  operating  expenses;  and  the 
statute  has  declared  that  the  fair  price  for  the 
service  rendered  shall  be  so  determined,  as  nearly 
as  may  be,  as  to  yield,  in  addition  to  such  neces- 
sary outgoes,  a  further  sum  which  shall  be,  for  the 
carriers  as  a  whole,  in  a  given  rate  district,  **a 
fair  return  upon  the  aggregate  value  of  the  rail- 


12 


way  property  of  such  carriers  held  for  and  used 
in  the  service  of  transportation."  The  statute 
does  not  contemplate  the  inclusion  of  anything 
beyond  this  in  fixing  the  rate. 

It  is  a  matter  of  common  knowledge  that  in  any 
extensive  or  complicated  system,  plant  or  instru- 
mentality, such  as  that  of  a  railway  or  public 
utility,  the  thing  does  not  wear  out  or  give  way  as 
a  whole.  Some  part  wears  or  weakens  to  the 
point  that  it  ceases  to  operate  satisfactorily,  and 
upon  being  repaired  or  replaced,  the  whole  con- 
tinues to  operate  satisfactorily.  These  repairs 
and  replacements  in  respect  of  any  particular  unit 
of  plant  or  equipment  become  necessary  only  at 
irregular  intervals,  but  in  an  extensive  and  hetero- 
geneous railway  or  utility  system  subjected  to  a 
variety  of  hazards,  they  tend  to  equalize  them- 
selves from  year  to  year,  and  the  tendency  is  still 
more  marked  if  longer  periods  be  compared. 

The  statute  does  not  indicate  how  frequently 
the  Commission  shall  revise  and  adjust  the  gen- 
eral level  of  rates  for  the  carriers  of  a  particular 
rate  district,  but  presumably  such  readjustments 
will  be  made  only  at  intervals  of  several  years. 
It  takes  an  appreciable  period  of  time  for  traffic 
to  adjust  itself  to  a  new  level  of  rates  and  such 
level  ought  not  to  be  disturbed  until  it  becomes 
clear  that  it  is  inadequate  or  excessive.  If  the 
intervals  between  readjustments  of  rate  levels 
are  long  enough  to  permit  the  law  of  averages  to 
operate  with  respect  to  repairs  and  renewals  and 
replacements  of  rolling  stock  and  equipment,  it 
seems  apparent  that  there  would  be  no  occasion 
at  all  for  the  introduction  of  any  estimated 
charges 'into  operating  expenses,  to  secure  a  fair 
statement  of  cost  of  operation  for  the  period.  If 
the  intervals  are  too  short  for  this,  the  justifica- 
tion arises  for  the  admission  of  charges  based  on 


13 


estimates  of  current  outlays.  Such  estimates, 
however,  when  permissible,  should  be  restricted 
to  elements  other  than  anticipated  shrinkage  in 
** value"  of  parts  of  the  property,  for,  as  has 
been  said  above,  the  carrier  is  not  a  trader  or 
merchandiser  in  respect  of  its  railway  property 
and  its  duty  in  connection  with  its  property  is  to 
maintain  the  same  in  efficient  operating  condition 
and  to  operate  it  efficiently  and  economically  in 
the  transportation  of  goods  and  persons ;  and  any 
charges  for  repairs,  renewals  and  replacements, 
w^hether  actual  or  estimated,  should  be  based  only 
upon  the  actual  requirements  for  those  purposes. 

When  any  part  of  a  unit  of  railway  property 
wears  to  such  a  point  that  the  particular  unit 
no  longer  operates  efficiently,  it  is  the  carrier's 
duty,  under  the  statute  and  in  the  exercise  of  ordi- 
nary business  judgment  alike,  to  either  repair  it 
or  replace  the  w^earing  part  of  such  unit,  and 
thereby  to  overcome  the  actual  deterioration  of 
the  unit  and  restore  it  to  full  operating  efficiency. 

*^If  in  the  interval  since  a  complete  unit  was  in- 
stalled, the  art  of  transportation  has  progressed 
to  such  a  point  that  it  has  become  obsolete  or  is 
inadequate  and  the  economies  to  be  realized 
justify  its  withdrawal  from  service,  it  should  be 
replaced  with  a  unit  of  improved  type  and  ade- 
quate capacity,  and  the  cost  of  retiring  the  obso- 
lete or  inadequate  unit,  if  too  great  to  charge 
against  the  provision  for  renewals  for  the  cur- 
rent year,  should  be  borne  by  future  passengers 
and  shippers.  ''Abandonments  occasioned  by 
changes  of  this  character  are  therefore  charge- 
able to  future  earnings.^'  (Kansas  City  Southern 

^Ry.  Co.  vs.  U.  S.,  231  U.  S.,  423,  451,  452.) 


14 

The  Sound  Treatment  of  "Retirement  Expense" 

When  a  given  unit  of  property  used  in  transpor- 
tation service  is  installed,  the  executives  who 
financed  its  installation  and  are  charged  with  the 
duty  of  maintaining  the  property  as  a  whole  and 
with  making  financial  provision  therefor,  realize 
that  certain  things  may  transpire  as  to  the  new 
unit  of  property  or  portions  thereof.  If  it  is  of 
such  a  character  that  it  has  wearing  parts,  or  that 
portions  of  it  will  be  affected  by  the  action  of  the 
elements,  the  executives  of  course  are  aware  that 
repairs  of  such  wearing  parts  will  have  to  be  made 
from  time  to  time,  else  the  unit  and  property  as 
a  whole  will  not  function  efficiently  and  will  break 
down  altogether  if  these  repairs  are  not  made  as 
required.  On  the  other  hand,  they  are  aware  that  a 
large  portion  of  the  property,  at  least  if  properly 
maintained  by  these  repairs  and  renewals  of  wear- 
ing parts,  has  a  practically  indefinite  life  in  ser- 
vice, unless  its  retirement  from  use  comes  about 
from  causes  in  no  way  related  to  the  effects  of 
use.  At  a  recent  hearing  before  the  Federal 
Power  Commission,  the  Secretary  of  War,  Mr. 
Weeks,  trenchantly  inquired  of  a  distinguished 
hydraulic  engineer  whether  an  estimate  could 
soundly  be  made  as  to  the  probable  **life''  of  a 
dam  such  as  would  figure  in  a  water-power  proj- 
ect. The  reply  was,  in  substance,  that  such  a 
thing  could  hardly  be  calculated,  because  dams 
known  to  be  more  than  2,000  years  old  are  still 
functioning  and  in  use,  with  no  signs  of  going 
out  of  service  because  of  any  consequences  of  age, 
use  or  wear.  Probably  these  dams,  too,  have  had 
practically  no  repair  work  done  upon  them  since 
they  were  built  before  the  Christian  era. 

As  has  been  said  by  Mr.  Webster  in  the  mono- 
graph already  referred  to: 


15 


** Stephenson's  second  locomotive  was  still 
in  use  in  1911  (E^icjineering  and  Contracting, 
October  11,  1911).  The  cast-iron  water- 
pipes  leading  from  the  river  Seine  to  the  foun- 
tains at  Versailles,  were  installed  in  1658, 
The  only  repairs  that  have  been  necessary 
after  two  and  a  half  centuries  of  service  are 
the  occasional  replacing  of  bolts  (Engineer- 
ing and  Contracting y  May  27,  1914).  Kome 
is  still  supplied  with  water  by  an  aqueduct, 
the  construction  of  which  was  begun  by  Quin- 
tus  Marcius  in  144  B.  C.  Tunis  is  now  sup- 
plied by  an  aqueduct  built  by  Hadrian  in 
A.  D.  120.  The  aqueduct  at  Nimes  has  been 
in  use  for  nearly  twenty  centuries.  There 
are  many  other  instances  of  masonry  and 
concrete  structures  which  have  survived  many 
hundreds  of  years  of  useful  service.'^ 

The  wearing  parts  of  units  of  railway  property 
are  currently  repaired  as  needed,  and  the  effect 
is  to  maintain  the  unit  in  existence  and  in  high 
operating  efficiency,  for  an  indefinite  and  unde- 
finable  period,  and  the  expense  of  this  repair  and 
replacement  of  wearing  parts  is  properly  assessed 
by  the  comj^any  executives  against  the  current  cost 
of  rendering  the  service  in  which  the  use  and  w^ear 
took  place. 

The  responsible  executives  of  the  carrier  also 
realize  that  although  the  newly  installed  unit  may 
continue  in  use  for  an  indefinite  and  incalculable 
period,  if  thus  maintained  in  good  operating  con- 
dition, it  may  go  out  of  use,  for  other  causes  than 
wear  or  the  flight  of  time,  and  that  such  retire- 
ment from  use  may  come  about  at  almost  any  time 
— a  time  in  no  way  susceptible  of  estimate  at  the 
time  it  is  installed,  but  varying  altogether  with 
the  particular  carrier,  the  particular  territory  be- 
ing served,  the  nature  of  the  service  being  ren- 


16 


dered,  the  various  factors  affecting  the  cost  of  ser- 
vice,  and  the  like.  The  unit  may  be  retired  from 
use  because  it  has  become  inadequate  to  meet  the 
growing  demands  for  service  (and  hence  is  uneco- 
nomical) or  because  new  inventions  have  resulted 
in  improvements  in  the  type  of  a  given  unit,  mak- 
ing its  retirement  economical  in  the  interests  of 
future  patrons.  A  larger  volume  of  traffic  can  be 
handled  or  the  existing  volume  of  traffic  can  be 
handled  more  cheaply  or  more  efficiently,  if  the 
present  unit  is  removed  and  a  new  one  put  in,  al- 
though the  unit  taken  out  is  still  functioning  as 
efficiently  as  when  installed.  The  time  when  such 
supersession  of  a  unit  will  take  place  cannot  be 
forecast  in  terms  of  years,  by  company  executives, 
engineers,  or  any  one  else,  at  the  time  the  unit 
is  installed.  ** Tables  of  useful  lives''  of  units 
of  that  kind  are  unavoidably  conjectural  and 
speculative,  bearing  no  possible  relationship  to 
the  controlling  factors,  which  vary  utterly  with 
the  individual  instance.  To  try  to  ** assign''  a 
probable  period  of  *^life"  to  the  unit  when  it  is 
installed,  and  then  charge  against  current  rates 
an  accrual  based  on  the  amortization  of  the 
cost  of  the  unit  over  that  period,  is  to  set  up 
a  system  of  swelling  operating  expenses  and 
** padding"  rates  on  a  basis  of  mere  conjectures, 
because  with  the  great  mass  of  raihvay  property 
its  proper  maintenance  by  current  repairs  con- 
signs all  ^^life  tables"  to  the  realm  of  silly  im- 
practicabilities, and  supersession,  when  it  does 
take  place,  occurs  for  causes  in  no  way  related 
to  such  **life  tables."  Moreover,  such  super- 
session comes  about  for  causes  which  make  im- 
proper the  amortization  of  its  cost  through  in- 
creased rates  during  the  period  before  it  is  super- 
seded.yr^^  ^^it  did  not  wear  out  in  the  service 
of  the  patrons  it  served.  They  paid  the  cost  of 
maintaining  it  in  good,  undiminished  operating 


17 


efficiency;  there  is  no  reason  why  they  should,  in 
addition,  pay  the  cost  of  retiring  it  to  put  in  a 
new  unit  which  will  serve  more  patrons  or  serve 
future  patrons  more  cheaply \i^^]\Q  existing  unit 
was  serving  present  patrons  e&ciently;  the  cost 
of  retiring  it  to  put  in  a  larger  or  more  economi- 
cal unit  becomes  a  proper  charge  against  those 
who  will  be  served  and  benefited  thereby.)/  The  ex-  '^ 
pense  of  retiring  property  should  therefore  be 
borne  hy  current  or  future  charges,  and  not  by 
anticipatory  accruals  (Kansas  City  Southern  R^. 
Co.  vs.  U.  S.,  231  V.  S.,  423,  451-2)yin  other  words, 
the  retiring  of  a  very  large  unit  may  necessitate 
the  distribution  of  the  amortization  of  the  invest- 
ment therein,  over  a  short  period  of  succeeding  i^ 
years.  >^ 

It  thus  appears  that  wherever  departure  is 
made  from  the  actual  current  outlays,  year  by 
year,  for  repairs  and  for  the  renewal  and  re- 
placement of  property  withdrawn  from  service, 
**  depreciation '^  charges  in  operating  expenses 
should  in  any  event  be  restricted  to  those  neces- 
sary to  equalize  from  year  to  year  the  charges  for 
extraordinary  repairs  and  for  renewals  and  re- 
placements which  occur  irregularly.  As  experi- 
ence shows  that  in  large  plants  and  other  utilities 
whose  property  is  distributed  sufficiently  widely 
to  be  subjected  to  a  variety  of  hazard,  the  actual 
costs  of  repairs  and  retirements  tend  to  equalize 
themselves  when  taken  over  a  period  of  years,  it 
is  apparent  that  there  is  no  need  at  all  for  per- 
mitting the  introduction  of  estimated  charges  in 
operating  expenses  to  cover  the  matter  of  **  depre- 
ciation'' in  connection  with  the  determination  of  a 
fair  level  of  rates  as  defined  in  the  statute,  unless 
the  Commission  contemplates  frequent  readjust- 
ments of  the  rate  level.  If  such  frequent  read- 
justments are  contemplated,  the  regulation  of  such 


18 


charges  should  be  based  on  the  actual  present 
and  past  experience  of  the  carriers,  and  the 
charges  themselves  should  be  proportioned  on  the 
basis  of  the  work  done  rather  than  on  mere  lapse 
of  time.  Extensive  reconstruction  projects  involv- 
ing numerous  renewals  and  replacements  cannot 
advisably  be  undertaken  at  a  time  of  the  year 
when  the  plant  is  working  under  full  load  or  over- 
load, for  at  such  times  operation  would  be  too 
much  impeded  by  the  execution  of  any  mainte- 
nance work  in  excess  of  actual  immediate  needs. 
Furthermore,  at  such  times  prices  are  usually 
high  and  the  supply  of  materials  and  labor  re- 
stricted, and  it  would  be  uneconomical  to  do  work 
of  this  character  which  is  not  absolutely  essential 
to  the  continuity  of  operation.  In  such  periods, 
therefore,  when  the  actual  disbursement  for  main- 
tenance work  is  comparatively  small,  the  esti- 
mated charges  may  properly,  if  ever,  be  intro- 
duced in  operating  expenses  to  make  provision  for 
the  time  when  traffic  has  slackened  and  the  forces 
of  the  carrier  can  advantageously  be  concentrated 
on  maintenance  work. 


Analysis  of  the  "Depreciation   Charges"  of  Railway 
Carriers  Since  1912 

Illustration  of  the  pertinency  of  the  foregoing 
suggestiontthat  care  be  taken  to  limit  **  deprecia- 
tion charges ' '  to  actual  maintenance  requirements 
rather  than  to  base  them  on  tables  of  assumed 
*4ives"  of  property ^is  afforded  by  the  fact  that 
an  examination  of  the  figures  published  in  the  In- 
terstate Commerce  Commission's  reports  on  rail- 
way statistics  shows  that  during  the  four  years 
from  June  30,  1912,  to  June  30,  1916,  the  credit 
balance  in  the  reserve  account  ^*  Accrued  depre- 
ciation" for  all  Class  I  railways  and  their  non- 


19 


operating  subsidiaries  increased  from  about  $300,- 
000,000.00  to  about  $555,000,000.00.  In  other 
words,  the  charges  to  operating  expenses  for  ^^  de- 
preciation'^ during  those  four  years  were  $255,- 
000,000.00  greater  than  was  necessary  to  provide 
for  all  retirements  of  equipment  and  other  rail- 
way property  made  during  that  period  and 
charged  against  the  reserve  thus  created.  How- 
ever, owing  to  some  anomalies  in  the  Commis- 
sion's rules  of  accounting  at  that  time  in  force, 
there  were  charges  made  to  *^ Profit  and  Loss'' 
account  to  the  extent  of  about  $59,000,000.00  for 
**loss  on  retired  road  and  equipment."  Granting, 
for  the  sake  of  argument,  that  all  of  this  $59,- 
000,000.00  might  properly,  in  the  absence  of  the 
** depreciation"  charges  in  operating  expenses, 
have  been  made  to  operating  expenses,  it  is  still 
true  that  the  charges  to  operating  expenses  in  this 
connection  ivere  about  $196,000,000.00  (the  differ- 
ence hetiveen  $255,000,000.00  and  $59,000,000.00) 
greater  than  were  necessary  to  provide  for  all  re- 
tirements actually  made  during  those  four  years, 
or,  in  other  ivords,  for  all  renewals  and  replace- 
inents  necessitated  during  that  period  on  the  as- 
sumption that  such  renewals  and  replacements 
had  cost  no  more  than  did  the  things  renewed  or 
replaced.  The  Commission's  rules  properly  per- 
mit the  excess  cost  of  the  replacement  over  the 
cost  of  the  original  to  be  charged  to  the  road  and 
equipment  account,  so  that  it  is  shown  by  the 
Commission's  figures  that  the  operating  expenses 
of  Class  I  carriers  and  their  subsidiaries  were 
overstated  during  those  four  years  by  nearly 
$200,000,000.00.  Similarly,  for  the  eighteen 
months  from  June  30,  1916,  to  December  31,  1917, 
the  credit  balance  in  the  reserve  account  **  Ac- 
crued depreciation"  for  such  carriers  increased 
about  $224,000,000.00,  whereas  the  charges  to 
** Profit  and  Loss"  for  **loss  on  retired  road  and 


20 


equipment/'  during  the  twenty-four  mont*hs  from 
December  31,  1915,  to  December  31,  1917,  were 
about  $30,000,000.00.  Owing  to  the  change  in  the 
reporting  year  from  that  ending  June  30th  to  that 
ending  December  31st,  there  is  an  overlap  of  six 
months  in  the  income  accounts  and  profit  and  loss 
accounts  contained  in  the  annual  reports  relating 
to  the  year  ended  June  30,  1916,  and  that  ended 
December  31,  1916,  and  it  is  impracticable  to  say, 
from  the  figures  published  by  the  Commission,  what 
this  item  of  **loss  on  retired  road  and  equipment'' 
charged  to  *' Profit  and  Loss"  is  for  the  eighteen 
months  from  June  30,  1916,  to  December  31,  1917. 
It  is  safe  to  say,  however,  that  it  is  materially 
less  than  thirty  millions  of  dollars,  and  therefore 
that  the  mnounts  cliarged  to  operating  expenses 
for  ^' depreciation' '  during  those  eighteen  months 
were  more  than  $194,000,000.00  in  excess  of  the 
amount  of  retirements  actually  made  during  that 
period,  so  that  for  the  five  and  one-half  years 
from  June  SO,  1912,  to  December  31,  1917,  the 
amounts  charged  for  ^' depreciation' '  in  operating 
expenses  ivere  over  $390,000,000.00  more  than  ivas 
necessary  to  provide  for  all  of  the  retirements  ac- 
tually made  during  the  period;  or,  in  other  words, 
the  operating  expenses  of  this  class  of  railroad 
common  carriers  as  reported  during  that  period 
were,  so  far  as  this  item  is  concerned,  overstated 
by  at  least  $390,000,000.00,  with  corresponding  ef- 
fect upon  the  net  operating  income  and  so  upon 
the  apparent  adequacy  or  inadequacy  of  the  rates 
paid  by  the  companies  represented  by  the  under- 
signed, in  common  with  all  other  users  of  similar 
commodities,  for  the  transportation  of  coal, 
oil,  iron,  steel,  pipe  and  other  materials  in  inter- 
state commerce. 

Another  concrete  instance  emphasizing  the  im- 
portance of  sound  treatment  of  **  retirement  ex- 


21 


pense''  may  be  taken  from  the  records  of  a  reg- 
ulated utility  of  whose  service  the  Consolidated 
Gas  ComjDany  (with  its  affiliated  companies)  is 
probably  the  largest  single  patron.  The  sums 
which  we  have  to  pay  for  telephone  service  enter 
heavily  into  our  operating  expenses,  amounting  to 
more  than  $200,000  per  year.  Examination  of  the 
figures  published  by  the  Public  Service  Commis- 
sion for  the  Second  District  shows  that  as  of  De- 
cember 31,  1914,  the  credit  balance  in  the  two  re- 
serve accounts  of  the  New  York  Telephone  Com- 
pany, entitled  ^^  Accrued  Depreciation'^  and 
'' Amortization, '^  was  $25,498,912.  Five  years 
later,  after  taking  care  of  all  retirements  of  fixed 
capital  actually  made  over  this  considerable  pe- 
riod, the  accruals  had  increased  the  reserves  to 
$63,390,038.  In  other  w^ords,  the  rates  charged 
during  the  five  years  had  included  the  collection 
by  the  company,  from  us  and  other  consumers, 
of  $37,891,126  more  than  the  actual  cost  of  prop- 
erty retirements  during  the  same  period.  In  the 
same  five  years,  the  telephone  company's  invest- 
ment in  fixed  capital  devoted  to  its  telephone  busi- 
ness was  increased  $76,805,076  by  the  addition  of 
new  facilities  and  equipment.  Thus  while  less 
than  $77,000,000  of  new  property  was  being  in- 
stalled, 49.33  per  cent,  of  its  total  cost  was  being 
collected  from  consumers,  over  and  above  the  ac- 
tual requirements  for  the  five  years,  on  the  theory 
of  providing  for  possible  but  uncertain  future  re- 
tirements. During  the  eight  months  ended  August 
31,  1920,  the  credit  balance  in  these  reserves  was 
increased  $6,580,064  over  actual  retirement  ex- 
penses, whereas  only  $14,460,695  w^as  in  the  same 
period  added  to  the  company's  capital  investment. 
In  other  words,  over  a  period  covering  five  years 
and  eight  months,  the  company  collected  from 
its  consumers,  to  make  good  its  losses  from  the 
retirement  of  property  from  service,  $44,471,190 


22 


more  than  its  actual  losses  from  such  retirements 
over  this  considerable  period,  or  approximately 
$7,850,000  in  excess  of  average  actual  yearly  re- 
quirements ;  and  the  credit  balance  in  its  reserves, 
as  of  August  31,  1920,  representing  collections 
from  consumers  over  actual  retirements,  was  $69,- 
970,102,  or  nearly  35  per  cent,  of  its  aggregate 
property  investment  of  $240,432,094. 

Whether  the  rates  charged  by  the  telephone 
company  or  by  the  railway  carriers  are  or  were 
reasonable  or  excessive,  we  do  not  undertake  to 
say.  That  question  is  for  the  regulatory  commis- 
sions charged  with  the  duty  of  seeing  to  it  that 
such  rates  are  kept  neither  too  high  nor  too  low. 
Our  comments  are  only  upon  a  system  of  accruals 
through  charges  to  operating  expenses  on  the  ba- 
sis of  theoretical  estimates,  which  leads  to  the  col- 
lection of  sums  so  greatly  in  excess  of  the  actual 
retirement  expense  over  a  representative  period. 
Whether  the  rates  actually  charged  yielded 
more  than  a  fair  return  over  and  above  actual 
operating  expenses,  we  do  not  here  discusSy  Any 
sums  collected  in  excess  of  actual  operating  costs, 
including  the  actual  retirement  expenses  (aver- 
aged, if  desired,  over  a  representative  period) 
should  be  collected  as  return  on  investment  or  not 
at  all.  No  carrier  or  utility  should  be  permitted 
to  collect  from  its  patrons  more  than  its  operating 
expenses  plus  a  fair  return,  and  no  carrier  or  util- 
ity should  be  permitted  to  make  its  return  from 
existing  rates  appear  inadequate  through  charg- 
ing to  operating  expenses  a  sum  whose  accrual  is 
not  required  by  any  actual  outlays  of  the  com- 
pany, either  current  or  prospective/^  No  implica- 
tion is  intended  to  be  conveyed  agamst  the  policy 
of  making  reserves,  out  of  the  fair  return,  for 
contingencies,  if  it  is  deemed  advisable  to  thus  se- 
gregate a  part  of  the  surplus  earnings.     There 


23 


should  be  left,  however,  no  room  for  doubt  that 
when  thus  segregated  such  a  reserve  still  repre- 
sents surplus  earnings  belonging  to  the  stockhold- 
ers and  that  upon  the  property  in  which  it  is  in- 
vested the  company  has  as  unquestionable  a  right 
to  earn  a  fair  return  as  it  has  upon  the  property 
representing  its  surplus  so  called. 

Concrete   Recommendations    as    to   the    Handling    of 
Depreciation  Charges 

These  were  the  practical  considerations  which 
led  the  Consolidated  Gas  Company  of  New  York, 
in  its  petition  of  June  1, 1920,  as  intervenor  in  Ex 
Parte  74  before  the  Commission,  relative  to  in- 
creases in  freight  rates,  to  present  to  the  Commis> 
sion  a  more  formal  statement  of  the  foregoing  con- 
tentions,  and  accordingly  to  urge  upon  the  Com- 
mission the  following  suggestions,  which  are  of 
equal  pertinency  to  your  present  inquiry : 

*  *  1.  That  the  above-stated  considerations  be 
taken  into  account  and  kept  in  mind  by  the 
Commission  in  all  pending  and  future  pro- 
ceedings for  the  fixation  of  the  rates  charge- 
able by  railroad  common  carriers  in  inter- 
state commerce. 

**2.  That  the  petitioner  be  permitted  to  in- 
tervene and  be  heard,  by  counsel,  in  such  pro- 
ceedings, and  to  file  a  brief  therein,  in  behalf 
of  the  considerations  hereinbefore  stated. 

**3.  That  the  Commission  will  find  that  for 
Class  I  carriers  there  are  no  *  classes  of  prop- 
erty for  which  depreciation  charges  may 
properly  be  included  under  operating  ex- 
penses,' and  that  it  will  require  that  the  main- 
tenance charges  for  any  calendar  year,  in- 
cluding charges  for  renewals  and  replace- 
ments, he  stated  on  the  basis  of  expenses  ac- 


24 


tually  incurred  during  that  year,  to  the  end 
that  freight  rates  be  placed  at  a  level  which 
will  be  fair  both  to  carriers  and  to  shippers, 
and  that  they  be  not  made  unduly  high  in  or- 
der to  provide  for  estimated  charges  not 
based  on  actual  facts. 

**4.  In  the  event  that  the  Commission  be  of 
opinion  that  a  year  is  not  a  suthciently  long 
period  to  include  representative  fluctuations 
in  maintenance  charges,  the  petitioner  prays 
that  the  rules  governing  estimated  charges 
for  'depreciation^  shall  hereafter  he  based  on 
the  actual  experience  of  the  carriers  during  a 
period  of  a  length  reasonably  sufficient  to  in- 
clude such  fluctuations  and  that  the  estimated 
charge  shall  he  distrihuted  from  year  to  year 
upoh  a  suitahle  operating  unit  (such  as,  for 
example,  car-miles),  so  that  during  years  of 
heavy  traffic  the  estimated  charge  may  be  cor- 
respondingly great  and  during  years  of  light 
traffic  it  may  be  correspondingly  less,  and 
thus  avoid,  so  far  as  may  be,  fictitious  fluc- 
tuations in  the  '  net  railway  operating  income ' 
which  the  statute  makes  the  test  of  the  ade- 
quacy or  inadequacy  of  a  given  schedule  or 
level  of  rates." 

The  Two  Opposing  Views  as  to  Provisions  for  the 
Upkeep  of  Property 

In  line  with  the  foregoing,  there  may  be  said  to 
be  two  opposite  views,  two  radically  differing  pol- 
icies, which  may  be  followed  by  a  regulatory  body 
in  fulfilling  duties  such  as  those  devolved  upon  the 
Interstate  Commerce  Commission  by  Section  20 
of  the  Interstate  Commerce  Act  as  amended : 


/ 


25 


1.  The  course  four-square  with  business 
practice  in  large  utility  and  industrial  estah- 
lishments;  which  recognizes  that  property- 
used  in  public  service  does  not  go  out  of  use 
on  arbitrary  or  theoretical  grounds  or  accord- 
ing to  any  preconceived  ** table  of  lives,"  but 
for  reasons  not  calculable  in  advance  as  to 
time,  and  commonly  related  to  economies  in 
the  cost  of  service  or  increases  in  demand  for 
service ;  and  hence  does  not  make  ' '  accruals ' ' 
of  reserves  over  estimated  periods  to  provide 
for  a  ^ Agoing  out  of  use''  which  does  not  oc- 
cur with  any  calculable  reference  to  such  esti- 
mates or  such  periods  and  does  not  undertake 
to  burden  present  consumers  or  patrons  with 
the  cost  of  retiring  property  altogether  ade- 
quate for  their  needs  but  not  adequate  for  the 
needs  of  a  larger  number  of  patrons  or  not  as 
economical  in  serving  future  patrons  as  some 
newly  developed  unit  or  machine. 

"^  2.  The  course  predicated  on  preconceived 
''lives  of  property";  which  disregards  actual- 
ities and  substitutes  for  business  experience 
the  theories  of  academicians;  which  creates 
unnecessary  charges  to  current  operating  ex- 
penses to  create  unnecessary  ** reserves,''  all 
to  the  end  that  through  these  accruals  current 
passengers  and  shippers  may  be  compelled  to 
contribute  to  a  piece-meal  but  surreptitious 
** purchase"  of  the  property,  to  be  effected  by 
the  deduction  of  the  amount  of  such  reserves 
from  the  sum  on  which  the  company  would 
otherwise  be  entitled  to  earn  a  return  or  the 
sum  for  which  the  company  would  be  entitled 
to  be  compensated,  when,  if  ever,  the 
*  theoretical  depredationists"  have  their  way 
and  the  Federal  Government  takes  over  rail- 
road property  for  governmental  ownership 
and  operation. 


-t 


26 


Decisions  of  the  Courts  and  Regulatory  Commissions 
Concerning  These  Opposing  Views 

Although  we  recognize  that  a  business  problem 
of  this  character  cannot  be  solved  merely  by  cita- 
tion of  judicial  decisions,  we  believe  that  an  analy- 
sis of  the  pertinent  rulings  may  prove  of  assist- 
ance to  the  Depreciation  Section  and  the  Bureau 
of  Accounts  at  this  juncture.  Particularly  in  the 
early  years  of  rate  litigation,  it  cannot  be  said 
that  the  Courts  always  perceived  the  problem  in 
all  its  aspects  or  phrased  their  discussion  of  it 
with  the  exactness  of  expression  which  has  come 

^  with  fuller  consideration.  It  remains  true  that  no 
leading  or  well-considered  case  has  decided  that 
** accrued  theoretical  depreciation"  must  be  de- 
ducted from  the  so-called  ^^rate  base"  and  pro- 
vided for  in  the  rate.  The  trend  of  decision  is 
unmistakably  toward  rejection  of  this  concept 
altogether.  As  has  recently  been  said  by  Ex- 
Judge  H.  M.  Wright,  the  distinguished  Special 
Master  who  has  heard  many  of  the  rate  cases 
arising  on  the  Pacific  Coast,  the  whole  subject 
must  be  re-examined  and  earlier  conclusions  re- 
vised, because  of  the  trend  of  judicial  decisions 

/and  recent  literature.  (See  Pacific  Gas  and  Elec- 
tric Co,  vs.  City  and  County  of  San  Francisco; 
U.  S.  Dist.  Ct;  No.  Dist.  of  Cal.;  Report  filed 
March  2,  1920;  quoted  from  on  page  71,  post). 

One  of  the  most  recent  decisions  in  the  Federal 
Courts  was  in  New  'York  and  Queens  Gas  Com- 
pany vs.  NewtoHi,  et  al.,  in  the  United  States  Dis- 
trict Court  for  the  Southern  District  of  New  York, 
on  November  19,  1920,  before  Mayer,  D.  J.,  on  a 
motion  to  confirm  the  Report  and  Opinion  of  the 
Honorable  A.  S.  Gilbert  as  Special  Master.  (See 
269  Fed.  277,  and  supplemental  opinion  by 
Mayer,  D.  J.,  not  officially  reported).  The  Special 
Master  had  ruled  that  there  should  be  no  deduc- 


27 


tion.  from  actual  investment  or  present  value  of 
property,  for  so-called  *^  expired  life^'  or  *^  accrued 
theoretical  depreciation/'  and  the  Federal  Court 
agreed  with  him  and  refused  to  make  any  such 
deduction. 

The  whole  issues  of  fact  and  engineering  and 
accounting  experience  having  to  do  with  the  main- 
tenance of  property  and  the  provisions  to  be  made 
for  renewals  and  replacements  were  exhaustively 
litigated  in  this  case,  and  the  Report  and  Opinion 
therein  seem  conclusively  to  establish  the  pro- 
priety of  handling  these  matters  in  the  practical 
business  way  urged  in  this  memorandum.  We 
quote  from  the  opinion  in  that  case  and  urge  that 
the  matters  of  fact  therein  set  forth  are  fatal  to 
the  theoretical  assumptions  on  which  some  of  the 
proposed  regulations  on  this  subject  are  based: 

"No  Deduction  for  'Accrued  Theoretical 
Depreciation* 

**In  determining  that  the  complainant's 
property  has  a  fair  present  value  of  at  least 
the  amount  of  the  complainant's  actual  in- 
vestment therein  as  found  by  me,  viz.,  at  least 
$1,655,877.94,  I  have  made  no  deduction  for 
what  is  termed  *  depreciation, '  in  whatever 
way  calculated.  Under  any  basis  of  deter- 
mining present  value,  the  complainant's 
property  is  now  worth  at  least  the  amounJ> 
of  such  investment  therein,  and  the  sound  rule 
of  law  and  policy  seems  to  require  the  allow- 
ance of  a  reasonable  return  upon  at  least  that 
sum. 

**Upon  the  present  trial,  it  was  insistently 
urged  upon  me  by  some  of  the  defendants 
that  there  should  be  deducted  from  the  cost 
of    the    property    (irrespective    of   whether 


28 


'original/  *  pre-war/  or  'present  reproduc- 
tion' cost  be  under  consideration)  an  amount 
claimed  to  represent  so-called  'accrued  theo- 
retical depreciation/  based  upon  an  assump- 
tion of  'life  expectancy'  for  a  gas  plant  and 
equipment  and  the  estimated  or  known  num- 
ber of  years  since  the  same  was  erected  or 
installed.  From  the  testimony  given  upon 
the  trial,  I  was  strongly  impressed  by  the 
fact  that  in  respect  of  a  very  large  proportion 
of  gas  property,  there  is  no  ascertainable 
'life  expectancy.'  The  withdraw^al  of  such 
property  from  service  comes  about  from  in- 
adequacy or  obsolescence  which  dannot  be 
forecast  in  terms  of  years  or  even  satisfac- 
torily guessed  at.  Certain  parts  of  operating- 
machinery  and  equipment  are  of  course  sub- 
ject to  effects  of  use.  The  replacement  of 
these  wearing  parts  enters  into  the  cost  of  re- 
pairs. As  to  the  substantial  units  of  struc- 
tures, apparatus,  mains,  and  equipment,  their 
withdrawal  from  the  property  accounts  comes 
about  from  causes  not  attributable  to  the  con- 
dition of  the  property  itself  or  any  diminu- 
tion in  its  operating  efficiency,  .but  varying 
utterly  with  the  particular  plant,  time,  local 
conditions  and  service  demands  and  hence 
capable  of  being  forecast  only  as  the  occasion 
for  such  change  in  plant  or  equipment  be- 
comes imminent. 

"The  Renewal  and  Replacement  of  Gas  Property 

"In  other  words,  in  order  to  keep  abreast 
of  improvements  in  the  art  of  making  and 
distributing  gas  when  and  as  it  becomes  eco- 
nomically advantageous  to  do  so,  and  to  meet 
the  growing  demand  of  the  public  for  service 
more  adequately  and  economically  than  would 


29 


be  possible  through  merely  making  additions 
and  extensions  to  existing  plant  and  equip- 
ment, larger  or  better  and  more  economical 
and  efficient  units  of  plant  and  equipment  are 
from  time  to  time  installed  to  take  the  place 
of  units  which  still  are  operating  as  efficiently 
as  when  first  installed.  The  loss  due  to  such 
supersession  cannot  properly  be  said  to  have 
accrued  during  the  period  the  superseded  unit 
was  in  service.  It  occurred  when  supersession 
took  place.  It  became  a  proper  charge  against 
the  economies  to  be  realized  therefrom.  It 
furnished  no  basis  for  the  imposition  of  an 
additional  charge  against  the  user  of  the 
superseded  unit  during  the  period  of  its  use- 
ful service  over  and  above  the  higher  cost 
of  operating  it.  Such  a  charge  could  not  be 
justified  either  on  the  ground  that  the  unit 
was  losing  potential  life,  or  that  the  capital 
invested  in  it  was  being  consumed,  because 
neither  is  true. 

"Additional  Burden  on  the  Consumer 
Unwarranted 

*Mn  order  to  justify  the  deduction  of 
*  theoretical  depreciation,'  I  w^as  asked  in  this 
case  to  assume  that  a  *  depreciation  reserve' 
equal  to  the  computed  theoretical  deprecia- 
tion' had  been  collected  from  the  public,  and 
then  to  deduct  from  the  company's  invest- 
ment the  amount  of  such  assumed  reserve. 
No  such  reserve  had,  in  fact,  been  collected 
or  accumulated  by  this  company.  The  rate 
chargeable  did  not  permit  it,  and  there  is  no 
reason  to  believe  that  the  Legislature,  in  pre- 
scribing the  rate,  ever  contemplated  it.  As 
I  have  set  forth  in  Findings  Nos.  32  and  27 
iof  my  Keport  and  as  I  have  elsewhere  mdi- 


30 


cated  herein,  the  complainant  gas  company 
has  maintained  its  property  and  investment 
intact  in  the  past,  through  renewals  and  re- 
placements, at  an  average  actual  cost  of  ap- 
proximately three  cents  per  thousand  cubic 
feet  of  gas  sold,  and  no  reason  appears  for 
believing  that  it  cannot  continue  to  do  so  on 
that  basis.  Even  assuming  that  the  statute 
permitted  such  a  rate,  to  have  imposed  on 
the  company's  consumers  an  additional  bur- 
den nearly  twice  as  great,  representing  a 
purely  theoretical  item  of  operating  cost, 
merely  to  accumulate  a  useless  reserve  to 
justify  a  drastic  deduction  from  investment 
in  some  ultimate  proceeding  as  to  rates,  could 
not  have  been  justified  on  any  sound  theory 
in  the  past  and  cannot  now  be  sustained  as  to 
the  future. 

"Effects   of  an   Unnecessary  Reserve 

**In  order  to  justify  the  assumption  that  a 
*  depreciation  reserve'  was  or  should  have 
been  collected,  defendants'  witness  Hine  testi- 
fied in  this  case  that  such  a  reserve  was 
necessary  *so  that  when  the  property  is  re- 
tired for  any. cause  whatsoever  the  fund  can 
be  charged  with  the  cost  of  the  property. '  He 
testified  also  that  the  reserve  should  be,  in  his 
opinion,  *  invested  in  the  property,'  and  that 
when  the  funds  were  needed  for  renewals  and 
replacements  they  would  be  provided  *by  issu- 
ing securities  against  construction  work 
w^hich  had  been  done  originally  out  of  this 
fund,  for  the  money  laid  aside  for  this  fund, 
just  to  reimburse  the  treasury  on  account  of 
these  expenditures.'  This  view  seemed  to  me 
to  disregard  the  obvious  fact  that  having  de- 
ducted the  amount  of  the  reserve  temporarily 


31 


invested  in  property  from  that  on  which  he 
proposed  the  company  should  be  allowed  to 
earn  a  return,  he,  to  all  intents  and  purposes, 
destroyed  the  earning  power  of  such  prop- 
erty and  investment;  that  therefore  he  could 
not  issue  any  securities  against  such  prop- 
erty, there  being  no  earnings  therefrom  with 
which  to  pay  interest  on  the  securities;  that 
the  reserve  could  never  thereafter  be  availed 
of  for  the  purpose  for  which  it  was  alleged  to 
have  been  created,  and  that  it  w^ould  be,  in 
fact,  as  if  it  had  never  been  created.  Thus  he 
not  only  failed  to  sustain  his  contention  that 
a  depreciation  reserve'  was  necessary  for  the 
purposes  which  he  alleged,  but  he  proposed  to 
treat  the  reserve  as  if  he  himself  believed  it 
to  be  both  unnecessary  and  ineffectual,  except 
for  the  purpose  of  justifying  a  deduction  from 
the  complainaint's  investment. 

*^It  is  obvious  that  the  collection  of  an  un- 
necessary reserve  and  its  periodic  deduction 
from  the  value  of  the  property  in  service 
would  operate  to  effect  a  piece-meal  purchase, 
on  the  part  of  the  public,  of  the  property 
used  by  the  utility  in  its  service.  In  other 
w^ords,  it  is  really  ashing  the  consumer  to  pay 
for  the  plant y  instead  of  paying  a  return  on 
the  investment.  If  such  a  consummation  is 
desirable,  of  which  there  is  no  evidence,  it 
should  be  effected  openly,  and  not  surrepti- 
tiously under  the  guise  of  providing  for  so- 
called  theoretical  depreciation.' 

"Present  Condition  of  the  Property 

''Mr.  Miller  testified  that  as  of  April,  1920, 
the  expenditure  of  $6,144.07  for  repairs,  re- 
newals and  replacements,  would  put  the  plant, 
structures,  machinery  and  equipment  in  con- 


32 


dition  substantially  as  good  as  when  they 
were  erected  or  installed.  His  testimony  in 
this  respect  was  not  contradicted  by  that  of 
any  witness.  This  sum,  however,  does  not,  in 
my  opinion,  measure  any  impairment  in  the 

•  present  value  of  the  property  used  and  use- 
ful in  the  gas  business.  It  represents  merely 
an  unmatured  obligation  to  maintain  the 
property  in  efficient  operating  condition  out 
of  future  earnings,  the  expert  witnesses  of 

'-  both  the  complainant  and  the  defendants 
agreeing  that  it  was  and  is  maintained  in  effi- 
cient and  first-class  condition,  I  therefore 
have  not  deducted  this  or  any  other  sum  rep- 
resenting so-called  *  accrued  depreciation' 
from  the  amount  found  by  me  to  represent 
the  investment  of  the  complainant  in  its  gas 
property  upon  which  it  is  entitled  to  have  its 
rate  such  as  to  yield  a  reasonable  return.'' 

Judge   Hand's   Rejection  of  "Accrued   Depreciation" 
Theories 

The  ** straight-line "  theory  of  *' depreciation" 
and  the  setting  up  of  ^^  reserves  "and  deductions 
based  thereon,  have  also  been  emphatically  re- 
jected by  Judge  Learned  Hand,  in  the  United 
States  District  Court  for  the  Southern  District  of 
New  York  (Consolidated  Gas  Co.  vs.  Neivton,  267 
Fed.,  231,  265;  P.  U.  K.  1920  F,  page  485).  The 
Special  Master  in  this  case  also  had  rejected  the 
claim  that  deduction  must  be  made  for  ^*  accrued 
depreciation,"  in  ascertaining  present  value. 
Judge  Hand  said: 

'^Maltbie  figured  a  *  straight-line '  deprecia- 
tion of  three  and  a  half  millions,  for  all  plants 
and  holders.     This  was  necessarily  a  conjee- 


33 


lure,  based  upon  the  supposed  life  of  the 
plant ;  it  has  no  application  while  the  plant  is 
kept  up,     *     *     * 

*^The  other  elements  of  depreciation  are 
for  mains,  about  one  million  five  hundred 
thousand  dollars,  and  services  and  meters, 
one  million  five  hundred  thousand  dollars. 
Ajiy  depreciation  in  the  mains  appears  to  me 
quite  fanciful.  Little  said  that  the  life  of  a 
main  when  properly  buried  was  indefinite ;  the 
only  question  is  of  obsolescence  and  repairs, 
and  I  should  suppose  that  obsolescence  would 
occur  only  after  it  got  too  small  for  its  re- 
quirements. It  might  of  course  be  possible  to 
show  that  all  necessary  mains  could  now  be 
laid  for  less  than  the  book  cost,  but  the  plain- 
tiff has  shown  the  contrary  by  Miller,  and  it 
is  not  contradicted. 

*^As  to  meters  and  services  the  case  is  not 
so  strong  because  even  if  their  life  be  seventy- 
five  years,  as  Little  thinks,  no  one  knows  the 
age  of  all  those  in  use.  Moreover,  the  depre- 
ciation of  one  million  five  hundred  thousand 
dollars  is  only  about  twelve  per  cent  of  their 
cost.  However,  the  same  rule  applies  as  be- 
fore. The  plaintiff  proved  the  cost  and  the 
necessary  repairs  to  bring  the  whole  plant  up 
to  its  original  condition.  It  proved  that  the 
cost  of  reproducing  fixtures  of  equal  capacity 
was  more  than  the  book  cost.  That  made  a 
case,  in  my  judgment,  which  was  proof  against 
any  theory  of  *  straight-line '  depreciation. 
The  allowance  for  repairs  might  be  attacked 
on  the  ground  that  the  condition  of  the  plants 
and  fixtures  in  fact  required  inordinate  re- 
pairs, but  that  was  not  done.  In  accordance 
with  the  principle  which  I  have  tried  to  dem- 
onstrate I  decline  to  make  any  allowance  for 
depreciation. ' ' 


Age  of  a  Plant  "Not  a  Function  in  Rate  Base" 

On  the  broader  aspects  of  the  subject,  Judge 
Learned  Hand  had  occasion  to  consider  its  legal 
and  economic  aspects  in  the  light  of  the  more 
thorough  and  intelligent  investigation  which  re- 
cent experience  has  prompted,  and  he  stated  his 
conclusions  as  follows: 

*^The  defendants  insist  upon  the  element  of 
depreciation  based  upon  an  allowance  each 
year  of  that  proportion  of  the  total  value 
which  a  year  bears  to  the  whole  life  of  the 
plant.  The  Supreme  Court  (Knoxville  Water 
Co.  vs.  Knoxville,  supra,  Minnesota  Rate 
Cases,  supra)  has  recognized  that  some  de- 
preciation is  a  proper  element  in  estimating 
the  *rate  base,'  but  has  not  as  yet  authori- 
tatively settled  on  what  principle  it  shall  be 
calculated.  It  seems  to  me  hardly  possible  in 
the  case  at  bar  to  avoid  taking  a  position  with 
regard  to  that  principle. 

*^If  the  proper  standard  for  a  *  rate-base'  is 
the  present  cost  of  a  substitute  plant  of  equal 
capacity,  as  I  believe,  depreciation  can  be  a 
function  of  it  only  in  case  the  allowance  for 
renewals  to  the  plant  under  consideration  will 
in  the  future  be  greater  than  that  of  the  as- 
sumed standard.  If  the  rates  allowed  in  the 
future  include  only  an  allowance  for  renewals 
of  a  new  plant  the  company  will  have  to  abate 
something  from  its  normal  profits  because  of 
its  extraordinary  renewal  charges.  Theoreti- 
cally it  makes  no  difference  whether  this  prob- 
lem is  met  by  giving  the  plant  a  smaller  value 
at  present  because  of  its  future  greater  re- 
newal charges  and  then  allowing  a  higher  rate 
for  renewals,  or  by  giving  it  its  present  value 
based  on  capacity  and  letting  it  bear  its  extra 
renewals  out  of  its  normal  profits.    Were  the 


35 


plant  sold,  the  future  abnormal  renewals 
would  be  reflected  in  the  sale  price,  being  dis- 
counted at  once,  but  that  would  be  because 
the  parties  must  at  present  clear  their  ac- 
counts once  and  for  all.  The  seller  would  be 
unwilling  at  once  to  abate  from  his  price,  and 
later  to  allow  the  buyer  from  time  to  time  for 
his  unusual  renewals.  In  the  case  of  a  public 
service  company  where  the  authorities  may 
always  require  the  plant  to  be  kept  up  to 
standard,  there  is  an  obvious  advantage  in 
declining  to  attempt  a  repeated  adjustment 
between  the  actual  renewals  necessary  and 
normal  renewals,  as  would  be  necessary  if  the 
present  prospect  of  such  allowances  were  now 
discounted;  it  is  the  better  practice  to  allow 
the  plant  to  bear  its  own  extra  renewals  and 
to  insist  that  it  shall  always  be  kept  up. 
Therefore,  it  appears  that,  so  far  as  concerns 
the  future,  the  age  of  the  plant  should  not  he 
a  function  in  the  'rate-base.' 

^ '  On  the  other  hand,  in  computing  the  *  rate- 
base'  from  the  original  cost,  depreciation  is  of 
vital  consequence.  Practical  men  will  prefer 
to  ascertain  the  cost  of  a  present  plant  by 
experience,  when  they  can,  rather  than  by 
estimate,  just  as  the  master  here  has  done. 
In  so  arriving  at  the  cost  of  a  present  plant 
of  equal  capacity,  it  is  clear  that  the  original 
cost  of  the  plant  in  question  must  be  abated 
by  depreciation,  so  far  as  that  is  reflected  in 
a  loss  of  capacity.  In  such  a  calculation,  how- 
ever, there  must  figure  past  renewals  as  an 
offset  to  past  depreciation  and  if  in  fact  the 
capacity  has  remained  the  same,  depreciation 
should  not  he  a  functidn  of  the  'rate  hase'  at 
all.  In  such  a  case  the  inquiry  as  to  deprecia- 
tion should  be  confined  to  changes  in  *  price- 
levels.'  " 


36 


There  heing  no  loss  of  capacity  to  serve,  in  the 
case  of  the  rolling-stock,  road-bed,  terminals^ 
round-honses,  and  other  property  and  equip- 
ment of  a  raihvay  common  carrier,  through  lapse 
of  time,  but  probably  rather  an  increase  in  ca- 
pacity and  efficiency  over  previous  years,  and  the 
property  being  in  fact  maintained  in  repair  and 
excellent  operating  condition,  as  the  statute  re- 
quires, there  is  no  sound  reason  to  set  up  and 
accrue  any  sum  for  *^  accrued  theoretical  deprecia- 
tion'' or  to  require  that  this  be  done. 

The  Nashville  Railway  Company  Case 

(^  The  so-called  *' accrued  theoretical  deprecia- 
tion'' concept  is  in  contradiction  to  the  rulings 
of  the  United  States  Circuit  Court  of  Appeals  for 
the  Sixth  Circuit  on  December  7,  1920,  in  Nash- 
ville C.  S  St.  L.  Ry.  Co.  vs.  United  States  (269 
Fed.,  351).  In  that  case,  the  railway  company 
had  computed  *^ depreciation"  of  roadway  for  the 
two  years  in  question  by  the  so-called  '^straight- 
line"  method,  taking  three  per  cent.'  of  the  value 
thereof  as  annual  depreciation  on  the  theory 
that  the  average  life  of  the  perishable  elements 
was  thirty-three  and  one-third  years,  and  had  de- 
ducted the  amount  from  gross  income.  The  Gov- 
ernment's contention  was  that  there  was  no  net 
depreciation  in  the  intrinsic  value  of  the  roadway 
and  structures  considered  as  a  unit  and  that  the 
deduction  should  not  have  been  made.  The  Cir- 
cuit Court  of  Appeals  sustained  this  view,  quot- 
ing with  approval  the  testimony  of  witnesses  that 
'Hhere  may  be  depreciation  in  the  units  compris- 
ing the  roadway,  track  and  structures  of  the  rail- 
road, while  there  is  no  depreciation  in  the  machine 
as  a  whole;"  also  that  it  is  possible  '*to  maintain 
the  roadway,  track  and  structures  so  that  there 
will  be  no  depreciation  if  we  consider  the  roadway, 


37 


track  and  structures  as  a  composite  wliole;"  also 
that  ^Hhe  service  life  of  any  normally  operated 
and  well  maintained  railroad  is  perpetual  and  it  is 
maintained  in  the  condition  of  property  serving 
its  purpose  by  annual  renewals  and  replace- 
^^ments. ' ' 

Contentions  of  the  Government  in  the  Nashville  Case 

Of  very  great  interest  in  connection  with  the 
foregoing  decision  of  the  United  States  Circuit 
Court  of  Appeals  are  the  following  excerpts  from 
the  brief  filed  In  behalf  of  the  United  States,  by 
way  of  reply  to  the  contention  of  the  brief  submit- 
ted in  behalf  of  the  railroad  company : 

*^The  Government  admits  that  there  would 
have  been  depreciation  to  the  roadway  of  the 
railway  for  the  years  1909  and  1910  after  all 
reasonable  and  proper  repairs  merely  had 
been  made;  but  the  Government  proved  that 
the  renewals  and  replacements  together  with 
the  repairs  which  were  made,  maintained  the 
roadway,  and,  in  fact,  kept  the  roadway  in 
as  good  or  better  condition  at  the  end  of  each 
of  said  years  as  it  w^as  in  at  the  beginning  of 
each  of  said  years,  and  that  therefore  there 
was  no  depreciation, 

**It  is  the  theory  of  the  Government  that 
the  usefulness  of  roadways  determines  their 
value  in  use.    In  other  words,  as  their  useful- 

"^  ness  isj  so  is  their  value.  If  their  usefulness 
remains  the  same,  their  value  also  remains  the 

^  sam,e;  if  their  usefulness  is  increased,  their 
value  is  correspondingly  increased;  if  their 
usefulness  is  decreased,  their  value  is  like- 
wise decreased.  It  is  obvious,  therefore,  that 
whatever  increases  or  reduces  the  usefulness 
of  railroads,  correspondingly  increases  or  re- 


38 


duces  their  value.  In  this  connection,  it  is 
well  known  that  wear  and  tear,  etc.,  reduces 
the  usefulness,  and  consequently  the  value  of 
railroads.  On  the  other  hand,  it  is  equally 
well  known  that  repairs,  renewals,  and  re- 
placement of  parts  increase  the  usefulness 
and  consequently  the  value  of  railroads.  It 
is  also  well  known  that  the  occurrence  of  wear 
and  tear  is  the  occasion  for  repairs,  renewals 
and  replacements  of  parts,  and  that,  with  the 
roadway  and  other  property  properly  man- 
aged, railway  companies'  wear  and  tear  no 
sooner  occurs  than  renewals  and  replacements 
are  made — so  that  both  take  place  simultane- 
ously and  tend  to  counteract  or  offset  each 
other. 

**When  this  occurs,  i.  e.,  where  wear  and 
tear  suffered  by  railroads  is  sought  to  be  off- 
set or  counteracted  by  repairs,  reneivals,  and 
replacements  of  parts,  one  of  three  results 
must  happen.  First,  if  the  wear  and  tear  is 
exactly  offset  or  counteracted  by  repairs,  etc., 
the  usefulness  and  value  of  the  railroad  re- 
mains the  same  and  the  value  is  said  to  be 
*  maintained'  intact.  Second,  if  the  wear  and 
tear  is  not  entirely  overcome  by  the  repairs, 
etc.,  the  usefulness  and  value  are  reduced  and 
the  value  is  said  to  be  depreciated'  to  the 
extent  of  the  difference  between  the  original 
and  present  value  of  the  railroad.  Third,  if 
the  wear  and  tear  is  more  than  overcome  by 
repairs,  renewals,  etc.,  the  usefulness  and 
value  is  *  increased'  and  the  increased  value  is 
regarded  as  *an  additional  capital  invest- 
ment. ' 


39 


**  Counsel  for  the  railway,  on  page  44  of 
its  brief,  says: 

*The  fallacy  in  the  Government's  theory 
is  first,  that  it  considers  *^ betterments''  as 
a  means  of  offsetting  depreciation.  This 
cannot  properly  be  done;  smns  for  better- 
ments are  charged  to  capital  account,  not 
operating  expenses.' 

The  Government  Proved  There  Is  No  "Accrued 
Depreciation"    of   Railway    Property 

**The  Government  did  not  consider  better- 
ments as  a  means  of  offsetting  depreciation 
when  sums  expended  for  betterments  were 
charged  to  the  capital  account  of  the  railway. 
The  Government  proved  that  it  is  an  estab- 
lished policy  of  American  railways  not  only 
to  maintain  but  to  improve  the  usefulness  and 
value  of  their  roadways;  and  to  accomplish 
this  end,  it  is  their  practice  to  make  repairs, 
renewals,  and  replacements  of  parts  as  occa- 
sion requires, '  and  that  as  a  result  of  such 
policy  and  practice,  railways  prevent  or  over- 
come depreciation  in  the  value  of  their  road- 
ways as  a  whole  and  continue  the  service  life 
of  their  roadways  indefinitely.  Materials  of 
a  more  modern  and  improved  type  are  con- 
stantly being  used  in  effecting  renewals  and 
replacements  of  a  roadway  which  actually 
constitute  an  improvement  or  betterment 
which  is  not  usually  shown  on  the  books,  as 
will  be  shown  from  Mr.  Isbell's  testimony,  on 
pages  43  and  44,  which  is  as  follows : 

*I  do  not  think  the  deduction  made  by 
the  railway  for  depreciation  of  its  roadway 
should  be  allowed  because  in  these  charges 
for  maintenance  of  roadway  are  included 
items  for  renewals  and  replacements.    Un- 


40 


der  the  income  tax  law,  renewals  and  re- 
placements should  be  charged  not  against 
expenses,  but  should  be  taken  from  a  depre- 
ciation reserve,  if  such  a  reserve  is  on  the 
books.  It  cQuld  not  be  taken  from  a  de- 
preciation reserve  unless  such  reserve  does; 
appear  on  the  books.  Then  it  is  not  an  al- 
lowable expense  or  deduction  on  the  income 
or  excise  tax  returns,  for  the  reason  that 
this  renewal  or  replacement  keeps  the  prop- 
erty to  its  original  value.  As  to  w^hat  I 
mean  by  original  value,  when  the  railroad 
replaces  any  item,  they  try  to,  according  to 
my  experience,  make  it  as  good  or  better. 
For  instance,  if  a  cross-tie  is  replaced,  if 
they  can  get  a  better  cross-tie  to  put  in 
there,  they  do  it.  In  the  matter  of  what  is 
technically  known  as  other  track  material, 
consisting  of  such  things  as  switches  and 
frogs  and  things  like  that,  they  try  to  put 
in  a  better  one  if  they  have  to  replace  an 
old  one ;  they  try  to  put  in  better  ballast,  if 
possible.  In  that  way  they  not  only  effect 
a  renewal,  but  they  have  an  improvement  or 
betterment,  which  is  not  usually  shown  on 
the  books.  Of  course,  if  they  build  addi- 
tional trackage,  that  is  charged  to  capital 
account,  and  is  an  addition  or  betterment, 
and  that  does  not  enter  into  this  question 
whatever     *     *     * 

*When  a  tie  is  played  out,  a  new  tie  is 
put  in  place.  That  is  called  a  renewal  or 
replacement.  In  the  same  way,  if  a  depot 
needs  to  be  rebuilt,  and  about  the  same 
character  of  structure  is  to  be  built,  that  is 
called  a  renewal  or  replacement  of  the  de- 
pot, and  the  same  thing  is  true  of  a  trestle. 
If  the  trestle  is  replaced  as  near  as  possi- 


41 


ble  at  about  the  same  cost  as  the  old  one, 
that  is  called  a  renewal  or  replacement  of 
that  bridge  or  trestle. 

^If  an  additional  track  is  built,  for  in- 
stance, a  branch  line  is  built  to  a  new  town 
or  new  territory,  even  if  it  is  one  mile  or 
fifty  miles  long,  that  is  called  an  addition 
or  betterment.  If  a  bridge  costing  $10,000 
is  replaced  by  a  new  one  costing  $20,000, 
then  $10,000  is  a  renewal  and  charged  to  op- 
erating expenses,  and  the  additional  $10,000 
is  an  addition  or  betterment,  and  that  goes 
into  the  capital.  It  is  not  charged  as  an 
expense  against  the  gross  income  for  one 
year.'  " 


The  Contention  of  the  Government  as  to  the 
Effect  of  Renewals   and  Replacements 

**  Counsel  for  the  railway  states  on  page 
45  of  its  brief  as  follows : 

*The  Government  gave  no  consideration 
to  such  repairs  as  painting  a  depot,  putting 
window^s  in  machine  shops,  fixing  the  floor 
of  a  section  house — that  class  of  repairs 
that  prolong  the  life  of  the  unit  repaired 
but  cannot  totally  arrest  its  depreciation.' 

**Mr.  Isbell,  one  of  the  Government's  wit- 
nesses, in  his  answer  to  the  following  question 
in  regard  to  repairs  to  depots,  shows  very 
plainly  that  repairs  are  taken  into  considera- 
tion (see  Tr.,  page  47) : 

*Q.  If  a  railroad  company  repairs  a  de- 
pot, by  painting,  for  instance,  will  that 
arrest  the  functional  depreciation  that  is 
accruing  daily  to  take  care  of  increased 
business  in  the  future? 


42 


'A.  It  arrests  the  deterioration  of  the 
plant.  It  replaces  the  paint.  It  would  not 
arrest  the  depreciation  of  any  other  part. 
That  would  be  arrested  when  that  other 
particular  part  might  be  repaired.'  '' 


**  Since,  as  Mr.  McKeand  stated,  a  railroad 
property  is  of  necessity  a  composite  prop- 
erty, made  up  of  individual  units,  the  proper 
and  only  basis  upon  which  any  sane  method 
of  depreciation  could  possibly  be  figured 
would  be  upon  the  composite  property  and 
not  upon  the  millions  of  individual  units 
which  go  to  make  up  the  composite  property. 

**In  other  words,  as  aptly  expressed  by  the 
learned  Trial  Judge  in  his  charge: 

*I  further  charge  you,  as  a  matter  of 
law,  construing  this  statute,  that  in  that 
sense  you  should  not  consider  each  of  the 
individual  units  that  enter  into  the  road- 
way. It  was  not  intended  to  have  a  system 
of  bookkeeping  with  reference  to  each  par- 
ticular cross-tie  or  each  particular  rail,  but 
you  should  look  to  the  value  of  the  roadway 
as  a  whole,  comparing  its  value  at  the 
beginning  of  the  year  with  its  value  at  the 
end  of  the  year'  (Tr.,  page  104). 

*^If  the  statement  of  counsel  for  the  rail- 
way that  *it  is  undisputed  that  functional 
depreciation  cannot  be  arrested,  retarded  or 
offset  by  repairs,  renewals  or  replacements' 
were  correct,  then  it  would  necessarily  follow 
that  no  matter  how  much  money  was  expended 
each  year  on  any  roadway,  then  it  would  be 
impossible  to  prevent  that  roadway  from  at 
some  time  becoming  absolutely  worthless,  and 
it  would  have  to  be  abandoned  at  some  time 


43 


in  the  future.  It  is  a  matter  of  common 
knowledge  that  such  a  catastrophe  never 
occurs,  and  that  if  a  roadway  is  properly- 
maintained  from  day  to  day  and  month  to 
month  and  year  to  year  by  the  expenditure 
of  proper  amounts  in  making  repairs,  renew- 
als and  replacements,  that  the  life  of  the 
roadway  is  perpetual  and  that  the  roadway 
will  never  have  to  be  junked  as  a  whole  or 
entirely  rebuilt.'' 


**  Since  the  railway  has  admitted  that  its 
railroad  is  a  well  maintained  railroad,  and 
since  one  of  its  experts,  who  was  called  as  a 
witness  for  the  railway  in  its  behalf,  has  sug- 
gested that  Hhe  service  life  of  any  normally 
operated  and  normally  and  well  maintained 
railroad  is  perpetual,  and  it  is  maintained 
in  the  condition  of  properly  serving  its  pur- 
pose by  annual  reneAvals  and  replacements,' 
it  is  apparent  that  the  service  life  of  the 
N.,  C  &  St.  L.  By.  is  perpetual  and  that  the 
repairs,  renewals  and  replacements  which 
were  7nade  to  it  during  the  years  1909  and 
1910  eliminate  both  functional  and  physical 
depreciation  or  any  other  hind  of  depreci- 
ation which  would  have  taken  place  had  it 
not  been  for  the  repairs,  renewals  and  re- 
placements which  were  made,  as  testified 
to  by  its  Chief  Engineer,  Mr.  Hunter  Mc- 
Donald." 

The   Basis  of  the   1920   Grant   of  Increased   Freight 

Rates 

The  Interstate  Commerce  Commission,  in  grant- 
ing the  increase  in  freight  rates  effective  last 
August   (Re  Increased  Freight  Rates,  1920,  58 


44 


I.  C.  C,  220),  was  required,  as  we  understood  it, 
to  determine,  in  accordance  with  paragraph  3  of 
Section  15-A  of  the  Interstate  Commerce  Act,  as 
then  recently  amended,  *Hhe  aggregate  property 
value''  of  the  railroads,  ujx)n  which  a  percentage 
constituting  a  fair  return  was  to  be  earned  under 
rates  fixed  by  the  Commission.  There  was  avail- 
able no  detailed  appraisal  of  the  railroad  prop- 
erties, and  the  carriers  submitted  as  a  basis  *Hhe 
book  figures  for  investment  in  road  and  equip- 
ment, improvements  on  leased  railway  property, 
materials  and  supplies  and  government  allocated 
equipment,  hereinafter  referred  to  as  the  book 
costs''  (page  227). 

The  Interstate  Commerce  Commission  pointed 
out  that 

**The  carriers  recognize  the  infirmities 
inherent  in  the  investment  accounts  as  car- 
ried upon  the  books  of  the  carriers,  as  a  meas- 
ure of  the  value  of  the  respective  properties 
taken  separately." 

The  aggregate  amount  carried  as  book  costs  of 
road  and  equipment  was  stated  to  be  $20,040,- 
572,611  (page  228). 

The  Commission  found  that 

*Hhe  value  of  the  steam-railway  property  of 
the  carriers  subject  to  the  act  held  for  and 
used  in  the  service  of  transportation  is,  for 
the  purposes  of  this  particular  case," 

approximately  $18,900,000,000  (Re  Increased 
F r eight  Bates,  1920,  58  I.  C.  C,  220,  229). 

/  The  exact  basis  on  which  the  Commission  re- 
duced the  aggregate  book  investment  from 
$20,040,572,611  to  $18,900,000,000  was  not  dis- 
closed in  the  published  opinion,  and  has  not  since 
been  made  public;  but  it  has  seemed  to  us  to  be 


45 


obvious  that  the  Interstate  Commerce  Commis- 
sion took  no  account  whatever  of  ^^ expired  life'' 
or  ^^ accrued  theoretical  depreciation"  in  arriving 
at  such  an  investment  figure  as  representing  a 
minimum  value  of  the  property  for  the  purpose 
^of  granting  emergency  relief.  Had  any  such 
deduction  been  made,  the  valuation  would  have 
been  placed  at  between  thirteen  and  fifteen  billion 
dollars  instead  of  at  $18,900,000,000,  which  was 
but  five  per  cent,  less  than  the  value  claimed  by 
the  carriers. 

The  Knoxville  Water  Company  Case 

The  Knoxville  Water  Company  case  (212  U.  S., 
1)  is  sometimes  urged  as  authority  supporting 
the  view  of  the  ultra-depreciationists.  In  that 
case,  decided  in  1909,  the  Supreme  Court  said: 

'*A  water  plant,  with  all  its  additions,  be- 
gins to  depreciate  in  value  from  the  moment 
of  its  use.  Before  coming  to  the  question  of 
profit  at  all  the  company  is  entitled  to  earn 
a  sufficient  sum  annually  to  provide  not  only 
for  current  repairs  but  for  making  good  the 
depreciation  and  replacing  the  parts  of  the 
property  ivhen  they  come  to  the  end  of  their 
life.  The  company  is  not  hound  to  see  its 
property  gradually  waste  tvithout  making 
provision  out  of  earnings  for  its  replacement. 
It  is  entitled  to  see  that  from  earnings  the 
value  of  the  property  invested  is  kept  unim- 
paired, so  that  at  the  end  of  any  given  term 
of  years  the  original  investment  remains  as 
it  was  at  the  beginning.  It  is  not  only  the 
right  of  the  company  to  make  such  a  provi- 
sion, but  it  is  its  duty  to  its  bond  and  stock- 
holders, and,  in  the  case  of  a  public  service 
corporation,  at  least,  its  plain  duty  to  the 


46 


public.  If  a  different  course  ivere  pursued 
the  only  method  of  providing  for  replace- 
ment of  property  ivhich  has  ceased  to  he  use- 
ful ivould  he  hy  the  investment  of  neiv  capital 
and  the  issue  of  new  honds  or  stocks.  This 
course  would  lead  to  a  constantly  increasing- 
variance  between  present  value  and  bond  and 
stock  capitalization — a  tendency  which  would 
inevitably  lead  to  disaster  either  to  the  stock- 
holders or  to  the  public,  or  both.'^ 

In  other  words,  there  should,  of  course,  be  at 
all  times  included  in  the  operating  expenses  of  a 
railroad  or  other  public  utility  a  sufficient  amount 
to  provide  for  the  replacement  and  renetval  of 
property  as  the  need  arises.  The  Court  referred 
to  **  making  good  depreciation '^  synonymously 
with  ^*  replacing  the  parts  of  the  property  when 
they  come  *to  the  end  of  their  life.''  This  does 
not  mean  that  a  reserve  for  *^  accrued  depreci- 
ation" based  on  theoretical  age  must  be  provided, 
if  provision  is  made  for  meeting  all  withdrawals 
and  replacements  of  property  when  and  as  the 
need  arises.  If  proper  provision  is  made  in  oper- 
ating exjjenses  for  current  replacements,  and  the 
property  is  kept  in  a  high  state  of  repair  and 
efficiency,  as  railroad  property  is  required  to  be 
maintained,  both  as  the  result  of  legal  requirement 
and  the  exigencies  of  operation,  the  investment 
remains  unimpaired  and  subject  to  no  deduction, 
and  no  ** reserve"  need  be  set  up  to  create  a  pre- 
text for  a  reduction. 

The  Minnesota  Rate  Case 

In  the  Minnesota  Rate  Case  (230  U.  S.,  352), 
the  Master  had  made  no  deduction  for  so-called 
depreciation,  holding  that  w^hile  as  to  certain 
classes  of  carrier  property  there  had  been  depre- 


47 


elation  in  fact,  yet  it  was  more  than  offset  by  the 
appreciation;  that  the  roadbed  was  constantly 
increasing  in  value  through  having  become  solid- 
ified and  adjusted  to  surface  drainage,  et  cetera. 
The  Supreme  Court  declined  to  approve  this  dis- 
position of  the  Master,  pointing  out  that  he  had 
also  allowed  a  gross  s<um  separately  for  adapta- 
tion and  solidification  of  the  roadbed.  At  page 
457,  Mr.  Justice  Hughes  said: 

*  ^  It  is  also  to  be  noted  that  the  depreciation 
in  question  is  not  that  which  has  been  over- 
come by  repairs  or  replacements,  but  is  the 
actual  existing  depreciation  in  the  plant  as 
compared  with  the  new  one.  It  would  seem 
to  be  inevitable  that  in  many  parts  of  the 
plant  there  should  be  such  depreciation,  for 
example,  old  structures  and  equipment  re- 
maining on  hand.  And  when  an  estimate  of 
value  is  made  upon  the  basis  of  reproduction 
new,  the  extent  of  existing  depreciation 
should  be  shown  and  deducted.  *  *  *  And 
when  particular  physical  items  are  estimated 
as  worth  so  much  new,  if  in  fact  they  be  depre- 
ciated, this  amount  should  be  found  and 
allowed  for.  If  this  is  not  done  the  physical 
valuation  is  manifestly  incomplete,  and  it 
must  be  regarded  as  incomplete  in  this  case. 
Knoxville  vs.  Knoxville  Water  Co.,  212  U.  S. 
1,  10.^' 

There  can  be  little  doubt  as  to  the  kind  of  depre- 
ciation the  Supreme  Court  was  discussing  in  the 
Minnesota  Bate  Case.  It  was  actual  deterioration, 
represented  by  old  and  useless  buildings  and 
equipment  remaining  in  existence  but  of  no  util- 
ity, not  equipment  and  buildings  actually  render- 
ing service  as  economically  and  efficiently  as  when 
new.  The  citation  by  the  Court  in  the  Minnesota 
Bate  Case  of  its  prior  opinion  in  the  Knoxville 


48 


case  reveals  what  was  meant  in  the  latter  case 
even  if  that  was  not  made  clear  in  the  opinion 
written  in  the  earlier  case  itself. 

In  Lincoln  Gas  Co.  vs.  Lincoln  (223  U.  S.,  349, 
363),  decided  two  years  after  the  Knoxville  case, 
the  Supreme  Court  said: 

**The  question  as  to  what  sum,  if  any,  upon 
the  facts  of  this  case,  should  be  annually  de- 
ducted from  the  net  income  as  a  permanent 
maintenance  or  replacement  fund  is  novel, 
and  presents  a  grave  problem.'^ 

Comments  on  the  Knoxville  Case 

The  observations  of  Mr.  Justice  Moody  in  the 
Knoxville  case  have  recently  been  discussed,  from 
what  may  be  regarded  as  an  executive  and  ac- 
counting point  of  view,  rather  than  that  of  legal 
theory,  in  a  letter  sent  to  one  of  the  members  of 
the  Interstate  Commerce  Commission  by  one  of 
the  authors  of  this  memorandum  (Mr.  Carter) 
under  date  of  December  7,  1920,  and  that  com- 
munication is  here  quoted  from  in  lieu  of  a  restate- 
ment of  the  subject-matter  thereof.  After  making 
the  quotation  from  the  Knoxville  case  set  out  on 
page  45  hereof,  ante,  the  letter  to  the  Commis- 
sioner continued: 

**  Writing  as  a  lawman,  it  does  not  seem  to 
me  that  this  expression  of  view  by  Judge 
Moody  in  his  opinion  in  the  Knoxville  Water 
Company  case  in  1909  is  necessarily  to  be 
construed  as  *the  holding  of  the  Supreme 
Court'  in  this  regard,  but  rather  as  ^ dicta' 
which  carries  no  finding  of  fact  or  force  of 
precedent. 

**It  is  a  question  Avhether  in  the  discussion 
of  this  subject  Judge  Moody  was  not  depart- 


49 


ing  from  the  field  of  law  and  fact  and  enter- 
ing that  of  theory  and  speculation  and  direct- 
ing his  attention  to  questions  of  economics 
and  finance,  regarding  which,  at  that  time, 
there  was  sharp  disagreement  between  such 
students  of  these  subjects  as  had  ventured 
to  express  an  opinion  thereon.  Or  whether 
Judge  Moody  did  not  go  even  further  than 
this  and  assume  a  familiar  knowledge  of  the 
effect  upon  physical  property  of  its  employ- 
ment in  the  public  service,  a  phase  of  the  sub- 
ject requiring  more  or  less  technical  engineer- 
ing knowledge  which,  it  must  be  assumed,  if 
the  Court  concluded,  as  is  alleged,  that  such 
property  gradually  wastes,  the  Court  did  not 
possess. 

**Must  it  be  assumed  that  the  Court  fell 
into  the  error  of  accepting  as  sound  theories 
of  depreciation  which  had  nothing  to  com- 
mend them  but  their  plausibility  and  which 
have  long  since  been  rejected  by  all  sound 
thinkers?  And  if  so,  would  it  not  be  reason- 
able to  subject  the  remarks  of  the  Court  to 
the  closest  scrutiny  and  analysis  as  to  their 
meaning,  in  order  to  determine  whether  they 
are  really  susceptible  of  the  kind  of  interpre- 
tation which  some  students  of  the  subject  are 
disposed  to  place  upon  them? 

**It  may  be  noted,  for  example,  that  Judge 
Moody's  language  has  been  availed  of  by  pro- 
fessional depredationists  as  sustaining  them 
in  the  application  of  theories  of  accrued  de- 
preciation designed  to  impair,  by  purely  arti- 
ficial means,  the  investment  of  public  utilities 
in  plant  and  equipment  devoted  to  the  public 
service.  In  fact,  it  is  the  only  language  ap- 
pearing in  any  decision  of  the  United  States 
Supreme  Court  which  even  appears  to  sus- 
tain these  destructive  theories. 


50 


'^ There  is  not  the  slightest  indication  that 
■in  Judge  Moody's  mind  there  Avas  any  thought 
of  the  impairment  of  the  investment  of  util- 
ities in  their  properties  through  the  applica- 
tion of  depreciation  theories.  On  the  other 
hand,  the  language  of  the  Court  in  the  para- 
graph quoted  plainly  discloses  the  intent  of 
the  Court  to  indicate  the  rights  and  privileges 
of  utilities  to  maintain  their  properties  and 
their  investment  intact.  In  the  lirst  sentence,, 
for  example,  the  words  *the  company  is  enti- 
tled' are  used;  in  the  second  sentence  appear 
the  words  'The  company  is  not  bound  to  see 
its  property  gradually  Avaste;'  in  the  third 
sentence  the  words  *It  (the  company)  is  enti- 
tled to  see  that  from  earnings,  etc.,  etc./  are 
used,  and  in  the  fourth  and  last  sentence  in 
the  paragraph  are  found  the  words  *  The  right 
of  the  company'  and  'Its  (the  company's) 
duty  to  its  bond  and  stockholders,  etc.;'  this 
sentence  also  indicating  that  in  the  Court's 
opinion,  making  provision  for  the  mainte- 
nance of  the  property  by  renewals  and  re- 
placements is  the  public  service  corporation's 
plain  duty  to  the  public. 

''From  the  writer's  point  of  view,  the 
thought  which  was  in  Justice  Moody's  mind 
and  which  he  sought  to  express  in  the  form 
of  a  rule  of  procedure  was,  in  substance,  that 
the  maintenance  of  plant  and  equipment  by 
renewals  and  replacements  was  a  proper 
charge  against  earnings  and  that  the  earnings 
should  be  adequate  for  this  purpose.  In  other 
words,  that  the  cost  of  such  maintenance 
should  not  be  capitalized.  All  of  which  is 
perfectly  sound.  In  fact,  it  is  so  self  evident 
as  to  lead  one  to  inquire  as  to  the  reason  for 
its  enunciation.  The  answer  is  found  in  the 
fact  that  in  the  Knoxville  Water  Company 


51 


case  the  Master  included  in  the  assets  of  the 
company — in  other  words,  in  the  rate  base 
upon  which  the  rate  of  return  was  computed — 
certain  plant  and  equipment  that  had  been 
superseded  by  other  plant  and  equipment  and 
had  been  definitely  withdrawn  from  service. 
In  the  Court's  opinion  this  inclusion  was  im- 
proper on  the  theory  that  the  discarded  plant 
and  equipment  should  have  been  charged 
against  prior  earnings  and  not  continued  in 
capital  account.  The  record  does  not  dis- 
close (1)  whether  the  earnings  had  been 
theretofore  adequate  to  enable  the  writing  off 
of  the  loss  due  to  the  withdrawal  in  question ; 
(2)  whether,  if  they  were  inadequate,  the 
company  had  the  right  arbitrarily  and  of  its 
own  motion  to  increase  its  rates  and  make 
them  adequate.  If  the  answer  to  both  is  in 
the  negative  then  an  obvious  error  was  com- 
mitted because  the  right  to  charge  the  loss 
against  the  earnings  continued  and  provision 
should  have  been  made  therefor  in  the  rate 
under  review,  which  would  require  a  slightly 
higher  rate  during  the  period  of  amortization 
than  would  be  necessary  to  pay  merely  a  re- 
turn on  the  unamortized  investment.  If  it 
was  the  Court's  intention  to  establish  a  rule 
that  the  loss  due  to  renewal  and  replacement 
of  property  may  in  no  event  be  charged 
against  earnings  accruing  after  the  fact,  then 
such  rule  has  definitely  been  set  aside  by  the 
United  States  Supreme  Court  in  the  Kansas 
City  Southern  case. 

^*It  has  come  to  be  generally  recognized 
that  a  very  large  percentage  of  the  cost  of 
supersessional  operations,  commonly  alluded 
to  as  *  renewals  and  replacements,'  is  due  to 
inadequacy  or  to  advancement  in  the  science 


52 


of  rendering  public  utility  service.  Some  of 
the  best  informed  engineers  attribute  from 
90  to  95  per  cent,  of  the  cost  of  so-called  re- 
newals and  replacements  to  these  causes  and 
from  live  to  ten  per  cent,  to  wear  and  tear. 
This  being  the  case  it  is  manifest  that  such 
cost  is  chargeable  against  current  or  subse- 
quent earnings  and  not  at  all  to  prior  earn- 
ings. As  a  matter  of  fact  it  is  almost  univer- 
sally provided  for  out  of  current  earnings. 
The  most  recent  system  of  accounting  formu- 
lated for  public  utilities  (*)  provides  not 
only  that  the  cost  of  renewals  and  replace- 
ments shall  be  charged  against  current  earn- 
ings but  that  in  case  the  amount  involved 
exceeds  the  current  provision  therefor  to- 
gether with  such  balance  as  may  appear  to 
the  credit  of  the  renewal  account  it  may  be 
carried  in  a  capital  suspense  account  pend- 
ing its  amortization  through  the  annual  pro- 
vision for  this  purpose. 

**In  this  connection  the  report  of  the  Spe- 
cial Master  in  the  NeAv  York  mid  Queens  Gas 
Company  case,  a  copy  of  which  is  enclosed^ 
contains  a  discussion  of  the  subject  and  of 
the  testimony  of  witnesses  in  the  case  who 
make  the  exploitation  of  theories  of  so-called 
'accrued  depreciation'  a  matter  of  their 
bread  and  butter. 

''The  fact  that  the  greater  part  of  the  plant 
and  equipment  of  a  utility  has  no  ascertain- 
able life  and  that  if  kept  in  repair  it  can  be 
operated  as  efficiently  as  when  it  was  installed 
until  the  end  of  time,  unless  for  purely  econ- 


(*)  Uniform  System  of  Accounts  for  Gas  and  Electric 
Companies,  recommended  to  the  regulatory  commissions  of 
the  various  States  by  the  National  Association  of  State  Rail- 
way and  Public  Utility  Commissioners  at  its  Annual  Con- 
vention in  Washington,  D.  C,  November  9-12th,   1920. 


53 


omic  reasons  it  is  displaced  by  other  plant 
and  equipment,  leads  to  the  conclusion  that  if 
Judge  Moody's  conclusions  were  based  upon 
the  assumption  that  such  property  had  a  defi- 
nite life  which  was  terminated  by  wear  and 
tear  and  that  in  the  meantime  it  was  grad- 
ually wasting,  he  was  palpably  and  obviously 
in  error.  In  this  as  in  all  other  debatable  sub- 
jects theory  must,  in  the  final  anal^^sis,  yield 
to  fact. 

*^It  is  not  necessary,  however,  to  ascribe 
error  to  the  Court  if  the  language  used  may 
be  shown  not  to  justify  the  extreme  interpre- 
tation put  upon  it  by  professional  depreda- 
tionists. 

*^The  first  sentence  in  the  quoted  para- 
graph reads  as  follows : 

*  Before  coming  to  the  question  of  profit 
at  all  the  company  is  entitled  to  earn  a  suf- 
ficient sum  annually  to  provide  not  only  for 
current  repairs  but  for  making  good  the 
depreciation  and  replacing  the  parts  of  the 
property  when  they  come  to  the  end  of  their 
life.' 

**If  there  is  any  doubt  that  what  is  meant  by 
the  last  half  of  the  sentence  is  that  the  com- 
pany is  entitled  to  earn  a  sufficient  sum  an- 
nually for  making  good  depreciation  by  re- 
placing the  parts  of  the  property  when  they 
are  withdraivn  from  service,  then  Congress 
has  settled  the  question  in  the  Water  Power 
Bill  b}^  providing  for  a  depreciation  reserve 
and  defining  very  definitely  w^hat  it  is  for, 
viz.,  the  renewal  and  replacement  of  plant 
and  equipment.  The  same  bill  also  plainly  in- 
dicates that  by  such  renewal  and  replacement 
the  investment  is  kept  intact  and  unim- 
paired.'' 


54 


**The  second  sentence  reads  as  follows: 

*The  Company  is  not  bound  to  see  its 
property  gradually  waste,  without  making 
provision  out  of  earnings  for  its  replace- 
ment. ' 

**In  the  light  of  the  facts  before  the  Court 
in  this  case  it  may  be  assumed  that  the  Court 
had  reference  to  the  practice  apparently  pre- 
vailing in  that  company  of  continuing  to 
carry,  in  capital  account,  property  which  had 
been  withdrawn  from  service  and  discarded, 
making  no  provision  either  at  the  time  or  sub- 
sequently for  the  amortization  out  of  earn- 
ings of  the  investment  therein,  Avhich  practice 
would  represent  a  wasting  of  assets  and  an 
impairment  of  the  investment  as  measured  by 
the  property  remaining  in  service,  and  that 
the  thought  in  the  mind  of  the  Court  was  that 
the  cost  of  property  displaced  and  tvithdrawn 
from  service  should  he  charged  against  the 
earnings. 

The  third  sentence  reads : 

*It  is  entitled  to  see  that  from  earnings 
the  value  of  the  property  invested  is  kept 
unimpaired,  so  that  at  the  end  of  any  given 
term  of  years  the  original  investment  re- 
mains as  it  was  at  the  beginning.' 

*^If  a  utility  has  been  permitted  to  earn  a 
sufficient  sum  annually  to  enable  it  to  charge 
all  property  withdrawn  from  service  against 
earnings  and  had  so  charged  off  all  displaced 
property  and  has  maintained  the  rest  of  its 
plant  and  equipment  in  good  operating  con- 
dition, so  that  at  the  end  of  any  terms  of 
years  its  capacity  for  rendering  service  re- 
mains unimpaired,  the  original  investment  in 


^y 


the  plant  still  in  service  remains  what  it  was 
at  the  beginning.  Prof.  Laughlin  has  well  re- 
ferred to  the  investment  as  a  stream  of  capi- 
tal. As  fast  as  water  from  the  stream  runs 
over  the  mill-wheel,  it  is  replaced  by  new  wa- 
ter. The  value  of  the  water-power  is  not  de- 
creased by  the  water  that  runs  away. 

*^  Judge  Learned  Hand,  in  the  Consolidated 
Gas  Company  case  last  August,  found  as  fol- 
lows, in  this  regard: 

*****  if  in  fact  the  capacity  (of  the 
plant)  has  remained  the  same,  deprecia- 
tion should  not  be  a  function  of  the  **rate 
base''  at  all.  In  such  a  case  the  inquiry 
as  to  depreciation  should  be  confined  to 
changes  in  ** price  levels''.' 

**Thus  interpreted  Justice  Moody's  opin- 
ion conforms  not  only  to  sound  theories  of 
economics  and  finance,  but  to  the  facts  regard^ 
ing  the  operation  and  maintenance  of  the 
plants  and  equipment  of  public  utilities. 

' '  Shrinkage  in  value  may  not  be  attributed 
to  the  mere  incidence  of  use  where  the  article 
used  does  not  deteriorate  from  use.  There- 
fore, the  word  *  depreciation'  applied  to  prop- 
erty which  does  not  deteriorate  from  use, 
must  have  the  meaning  of  *a  shrinkage  in 
value'  due  to  a  decrease  in  the  price  level. 
Similarly  the  word  *  appreciation '  applied  to 
property  which  does  not  improve  from  use 
must  have  the  meaning  of  *an  expansion  in 
value'  due  to  an  increase  in  the  price  level. 

**The  proposition  that  an  investment  in 
property,  which  does  not  deteriorate  from 
use,  begins  to  *  shrink'  the  moment  it  is  made, 
notwithstanding  the  fact  that  the  price  level 
remains  unchanged,  cannot  be  sustained  for  a 


56 


moment.  It  is  not  conceivable  that  Justice 
Moody  would  have  made  such  a  pronounce- 
ment as  this;  and  yet,  shorn  of  all  verbiage, 
this  is  just  the  interpretation  which  some 
theorists  seek  to  place  upon  his  utterances. 

**The  kind  of  shrinkage  which  Justice 
Moody  had  in  mind  is  that  which  would  result 
from  failure  to  charge  the  cost  of  displaced 
property  against  earnings  and  from  capitaliz- 
ing the  expenditures  involved  in  superses- 
sional  transactions  thus  destroying  the  iDarity 
between  outstanding  stock  and  hojids  and 
property  in  actual  service,  the  former  ex- 
ceeding the  latter,  thus  producing  a  shrink- 
age in  the  property  in  service  as  compared 
with  the  capitalization.  That  this  was  really 
all  that  he  had  in  mind  would  seem  to  be  es- 
tablished beyond  controversy  by  his  remarks 
immediately  following  those  heretofore 
quoted : 

*If  a  different  course  w^ere  pursued  the 
only  method  of  providing  for  replacement 
of  property  which  has  ceased  to  be  useful 
would  be  by  the  investment  of  new  capital 
and  the  issue  of  new  bonds  or  stocks.  This 
course  would  lead  to  a  constantly  increas- 
ing variance  between  present  value  and 
bond  and  stock  capitalization — a  tendency 
which  would  inevitably  lead  to  disaster 
either  to  the  stockholders  or  to  the  public, 

or  both.'  '' 

1 

The  Kansas  City  Southern  Case 

It  may  further  be  pointed  out  that  if,  as  is  often 
urged,  the  Supreme  Court  intended  in  the  Knox- 
ville  case  to  hold  that  the  cost  of  superseded  prop- 
erty should  not  be  amortized   from  present  or 


V 


57 


future  earnings,  its  decision  in  Kansas  City 
Southern  By.  Co',  vs.  U.  S.  (231  U.  S.  423;  quoted 
from  on  page  93,  post),  must  be  regarded  as  an 
overruling  precedent.  The  major  part  of  the 
culminated  depreciation  involved  in  the  Knoxville 
case  arose  from  the  abandonment  of  a  water  sta- 
tion which  had  cost  a  predecessor  company 
$52,000.  Its  withdrawal  from  service  was  attrib- 
uted to  the  fact  that  it  was  a  duplication  of  plant 
facilities,  and  its  use  by  the  present  company  was 
no  longer  economical  or  necessary.  The  position 
of  the  company  before  the  Circuit  Court  was  that 
the  amount  of  ** culminated  depreciation''  should 
not  be  deducted  from  the  **rate  base''  unless  and 
until  the  same  had  been  amortized  and  provided 
for  through  the  operating  expense  accounts  (Print 
202;  13th  Exception,  Print  191).  The  Circuit 
Court  sustained  this  contention.  The  Supreme 
Court  deducted  $50,000  for  *  depreciation"  from 
the  figures  representing  * ^ reproduction  cost  new," 
but  omitted  to  add  anything  to  the  expense  ac- 
counts for  the  amortization  of  the  sum  deducted. 
In  the  Kansas  City  Southern  case,  nearly  five 
years  later,  the  Supreme  Court  sustained  a  rule 
of  the  Interstate  Commerce  Commission  provid- 
ing for  the  amortization  by  way  of  charge  to 
future  operating  expenses  of  the  cost  of  portions 
of  a  railway  division  withdrawn  from  service  be- 
cause of  the  construction  of  a  new  line  with  lower 
grades  and  increased  capacity,  holding  that  the 
cost  of  property  thus  withdrawn  from  service 
should  not  remain  in  the  investment  accounts  and 
that  **  abandonments  occasioned  by  changes  of 
this  character  are  therefore  chargeable  to  future 
earnings. ' ' 


58 

The  First  Consolidated  Gas  Company  Rate  Case 

The  case  of  Willcox  vs.  Consolidated  Gas  Com- 
pany (212  U.  S.,  19),  which  was  decided  on  Jan- 
uary 4,  1909,  the  same  day  as  the  case  of  the 
City  of  Knoxville  vs.  Knoxville  Water  Co.  was 
decided,  but  in  which  the  opinion  was  filed  on  Jan- 
nary  12,  1909,  is  sometimes  cited  as  a  companion 
case  to  the  Knoxville  case  and  in  support  of  the 
contention  that  *^  theoretical  accrued  deprecia- 
tion'' should  be  deducted  from  the  reproduction 
cost. 

Any  claim  that  the  decision  in  the  first  Consoli- 
dated Gas  Company  case  sustains  such  a  theory 
is  due  to  a  lack  of  familiarity  with  the  facts  in 
that  case,  and  with  what  the  Court  did  in  fact  find 
and  decide.  The  Master  in  that  case  flatly  re- 
jected the  claims  of  fact  on  which  *  theoretical  de- 
preciation" was  advanced  by  the  defendants'  wit- 
ness Marks,  for  the  first  time  in  any  rate  case  in 
Court  (Master's  Report,  pages  35-37) ;  Judge 
Hough,  sitting  in  the  United  States  Circuit  Court, 
approved  the  Master's  finding  (157  Fed.  Rep., 
849,  856),  and  the  United  States  Supreme  Court 
expressed  its  concurrence  with  the  lower  court  in 
failing  to  deduct  so-called  depreciation  (212  U.  S., 
19,  52). 

The  facts  in  the  first  Consolidated  Gas  Company 
case,  as  disclosed  in  the  record,  are  in  brief  as 
follows:  The  complainant  called  Frederick  J. 
Mayer,  who  had  been  a  practicing  mechanical  en- 
gineer for  thirty-four  years,  and  for  the  preced- 
ing twenty-three  years  had  been  connected  with 
the  firm  of  Bartlett,  Hayward  &  Co.,.  the  largest 
manufacturers  of  gas  holders  and  apparatus  in 
the  country.  Mr.  Mayer  testified  to  a  value  of 
the  plant,  consisting  of  buildings,  apparatus,  hold- 
ers and  general  connections  at  the  stations,  of 
$15,532,489,  after  deducting  the  sum  of  $604,988, 


59 


*'for  depreciation  based  on  an  examination  of 
each  individual  item  upon  which  it  was  com- 
puted. Such  deduction  represented  his  esti- 
mate of  what  w^ould  be  required  to  place  the 
plant  in  every  respect  in  condition  as  good  as 
new,  and  amounted  in  the  aggregate  to  $604,- 
988.''    (Master's  Report,  pages  29  to  30,  35). 

A  purported  valuation  w^as  also  put  in  by  Mr, 
Henry  H.  Edgerton,  who  estimated  the  value  of 
the  ^^ plant''  at  $10,023,057.25;  and  another  pur- 
ported valuation  was  put  in  by  William  D.  Marks, 
also  called  in  behalf  of  the  defendants,  who  esti- 
mated the  value  at  $9,348,692.  (Master's  Report, 
page  29.) 

The  Master  reported  (page  31)  that  Mr.  Edger- 
ton and  Mr.  Marks 

**  showed  no  especial  qualifications  to  testify 
as  experts  on  this  branch  of  the  case.  Neither 
Mr.  Marhs  nor  Mr.  Edgerton  had  recent  expe- 
rience in  the  construction  of  gas  plants  in 
large  cities  or  shoived  familiarity  with  exist- 
ing metropolitan  conditions.  The  former, 
some  30  years  ago,  was  connected  with  the 
construction  of  a  plant  in  St.  Louis,  but  his 
practical  experience  in  recent  years  has  been 
limited  to  small  towns  in  North  Carolina.  He 
has  never  conducted  building  operations  or 
installed  manufacturing  apparatus  in  New 
York  City.  This  is  the  case  likewise  with  Mr. 
Edgerton.  His  chief  connection  with  practi- 
cal gas  manufacturing,  aside  from  a  small 
plant  in  Connecticut,  appears  to  have  been 
over  30  years  ago.  Neither  of  these  gentle- 
men made  a  careful  detailed  examination  of 
the  plants,  and  each  frankly  stated  that  the 
time  at  his  disposal  was  entirely  inadequate 
for  the  preparation  of  an  accurate  appraisal 
of  values.'' 


60 


Mr.  Marks,  the  defendant 's  witness,  had  made  a 
deduction  for  *  theoretical  depreciation  of  the 
proposed  life  of  the  plant,''  and  this  deduction 
was  completely  rejected  by  the  Master,  as  appears 
from  the  following  portion  of  his  report  (pages 
35  to  37) : 

'*  Having  thus  obtained  his  total  cost,  Mr. 
Mayer  made  deductions  for  depreciations 
based  on  an  examination  of  each  individual 
item  upon  which  it  was  computed.  Such  de- 
ductions represented  his  estimate  of  what 
would  be  required  to  place  the  plant  in  every 
respect  in  condition  as  good  as  new,  and 
amounted  in  the  aggregate  to  $604,988. 

**The  examination  made  by  Mr.  Edgerton 
was  of  such  a  cursory  nature  that  his  figures 
for  depreciation  were  necessarily  made  less 
carefully.  In  one  case,  for  instance,  he 
ascribed  the  same  depreciation  of  10  per  cent, 
to  new  apparatus  installed  in  1904-5,  as  to  old 
apparatus  installed  15  or  16  years  earlier. 

*  ^  Mr.  Marks  did  not  particularly  regard  the 
extent  of  depreciation  actually  existing,  but 
assumed  a  theoretical  deterioration  of  the 
supposed  life  of  the  plant. 

'* He  testified: 

'^  'Depreciation  results  from  several 
causes.  The  most  ordinary  one  is  decay  or 
wear  and  tear,  as  observed.  There  is  an- 
other factor  which  is  inadequacy,  owing  to 
the  increase  of  the  business.  There  is  also 
another  cause  of  depreciation,  obsolescence, 
which  is  due  to  the  changes  in  the  arts  and 
in  the  methods  and  in  the  general  growth 
of  scientific  knowledge ;  if  a  works  built  at 
a  certain  period  is  kept  in  perfect  repair, 


61 


meaning  by  that,  always  restored  to  their 
original  condition,  and  in  good  worldng 
condition,  there  remains,  assuming  that,  a 
depreciation  due  to  both  obsolescence  and 
to  inadequacy.' 

**In  this  view  he  made  estimates  on  the 
theory  of  the  cost  of  final  replacement  to  cover 
such  inadequacy  or  obsolescence  ranging 
from  25  per  cent,  to  60  per  cent,  and  based 
on  a  supposed  life  of  120  years  for  the  plant. 
The  discrepancy  between  his  valuations  and 
those  of  Mr.  Mayer  is  largely  due  to  their  dif- 
ferent methods  of  estimating  depreciation. 
He  said : 

**  *Mr.  Mayer  does  not  differ  largely 
from  my  own  figures  of  structural  cost. 
You  may  say  for  all  ordinary  purposes  they 
coincide,  with  the  exception  of  the  gas 
holders,  and  even  there  they  do  not  differ 
largely.  It  is  the  question  of  depreciation 
entirely. ' 

^^As  will  hereafter  appear,  it  is  proper  in 
the  administration  of  a  manufacturing  plant 
to  tahe  depreciation  of  the  character  above 
described  into  account  and  provide  against  it 
by  setting  aside  a  reserve  fund  from  current 
earnings.  For  the  purpose  of  determining 
present  value,  however,  particularly  on  the 
basis  of  cost  of  reproduction,  the  method  fol- 
lowed by  Mr.  Marks  does  not  commend  itself. 
It  appears  from  the  record  without  substan- 
tial dispute,  that  while  certain  of  the  plants 
and  apparatus  may  not  be  in  perfect  repair, 
they  are,  as  a  whole,  in  efficient  operating  con- 
dition, and  that  a  large  proportion  of  their 
capacity  is  represented  by  the  latest  pattern 
of  water  gas  apparatus  installed  within  the 


62 


last  few  years.    The  books  show  expenditures 
since  November,  1885 : 

For  renewals  offsetting  depre- 
ciation by  loss  or  abandon- 
ment   $1,227,683.10 

For  repairs  to  buildings 1,275,749.03 

For  repairs  to  apparatus 4,865,362.51 

New  construction 3,904,937.31 

Total $11,273,731.95 

**The  fact  thus  being  that  the  plants  are  in 
good  order  and  operating  efficiently,  it  does 
not  appear  reasonable,  for  the  purposes  of 
this  case,  to  charge  them  with  a  theoretical 
deficiency  so  great  as,  if  actually  existing, 
would  make  their  successful  operation  a 
practical  impossibility.  An  estimate  of  de- 
preciation like  those  of  Mr.  Edgerton  and 
Mr.  Mayer,  based  on 'a  detailed  examination 
of  the  property  as  it  stands  to-day,  affords  in 
my  opinion  a  more  fair  and  practical  method 
to  be  followed  in  determining  its  value. 

*^I  accordingly  find  and  report  the  value  of 
the  complainant's  plants  to  be  substantially 
in  accordance  with  the  estimate  of  Mr.  Mayer, 
a  summary  of  which  is  given  below;  but 
adopting,  for  purposes  of  convenience  and  to 
allow  for  possible  over-valuations  in  some 
details,  the  round  figure  of  $15,500,000,  in- 
stead of  $15,532,489,  as  shown  by  the  ap- 
praisal.'' 

It  is  true  that  the  Master  made  a  deduction  for 
the  amount  representing  Mr.  Mayer's  estimate 
**of  what  would  be  required  to  place  the  plant  in 
every  respect  in  condition  as  good  as  new,"  but 
the  amount  was  arrived  at  ^y  the  actual  examina- 
tion of  the  plant  and  not  by  any  theoretical  esti- 


63 


mate  of  expired  age  based  upon  hypothetical  lives 
attributed  to  the  component  p^rts  of  the  plant  or 
by  a  process  of  averaging  which  is  altogether 
baseless  and  misleading.  i 

The   Opinion  of  Judge   Hough  in  the   Circuit   Court 

When  the  report  of  the  Master  in  the  Consoli- 
dated Gas  case  came  before  Judge  Hough  in  the 
United  States  Circuit  Court,  he  completely  ap- 
proved the  Master's  finding  and  his  method  of  ar- 
riving at  the  value  in  this  respect  (Consolidated 
Gas  Co.  vs.  City  of  New  York,  157  Fed.  Kep.,  849, 
854,  855,  856),  saying: 

**It  appears  by  undisputed  evidence  that 
some  of  these  last  items  of  property  cost  more 
than  new  articles  of  the  same  kind  would  have 
cost  at  the  time  of  inquiry;  that  some  are 
of  designs  not  now  favored  by  the  scientific 
and  manufacturing  world,  so  that  no  one  now 
entering  upon  a  similar  business  would  con- 
sider it  wise  to  erect  such  machines  or  obtain 
such  apparatus.  In  every  instance,  hoivever, 
the  value  assigned  in  the  report  is  what  it 
would  cost  presently  to  reproduce  each  item 
of  property,  in  its  present  condition,  and  cap- 
able of  giving  service  neither  better  nor  worse 
than  it  noiv  does.  As  to  all  of  the  items  enu- 
merated, therefore,  from  real  estate  to  me- 
ters inclusive,  the  complainant  demands  a 
fair  return  upon  the  reproductive  value  there- 
of, which  is  the  same  thing  as  the  present 
value  properly  considered.  To  vary  the 
statement:  Complainant's  arrangements  for 
manufacturing  and  distributing  gas  are  re- 
ported to  be  worth  the  amounts  above  tabu- 
lated if  disposed  of  (in  conunercial  parlance) 
*as  they  are.' 


64 


*'Upon  authority,  I  consider  this  method  of 
valuation  correct.  What  the  Court  should  as- 
certain is  the  ^fair  value  of  the  property  be- 
ing used'  (Smyth  vs.  Ames,  169  U.  S.,  at  page 
546,  18  Sup.  Ct.,  at  page  434  [42  L.  Ed., 
819] ) ;  the  *  present'  as  compared  with  ^origi- 
nal' cost;  what  complainant  ^employs  for  the 
public  convenience'  (169  U.  S.,  at  page  547,  18 
Sup.  Ct.,  at  page  434  [42  L.  Ed.,  819] ) ;  and  it 
is  also  the  ^  value  of  the  property  at  the  time 
it  is  being  used'  {San  Diego  Land  Co.  vs.  Na- 
tional Citij,  174  U.  S.,  at  page  757, 19  Sup.  Ct., 
at  page  811  [43  L.  Ed.,  1154] ) .  And  see,  also, 
Stanislaus  Co.  vs.  San  Joaquin  Co.,  192  U.  S., 
201,  24  Sup.  Ct.,  241  [48  L.  Ed.,  406]).  It  is 
impossible  to  observe  this  continued  use  of 
the  present  tense  in  these  decisions  of  the 
highest  court  without  feeling  that  the  actual 
or  reproductive  value  at  the  time  of  inquiry 
is  the  first  and  most  important  figure  to  be 
ascertained,  and  these  views  are  amplified  by 
San  Diego  Land  Co.  vs.  Jasper  (C.  C),  110 
Fed.,  at  page  714,  and  Cotting  vs.  Kansas 
Citij  Stock  Yards  (C.  C),  82  Fed.,  at  page 
854,  where  the  subject  is  more  fully  discussed. 
Upon  reason,  it  seems  clear  that  in  solving 
this  equation  the  plus  and  minus  quantities 
should  be  equally  considered,  and  apprecia- 
tion and  depreciation  treated  alike.  Nor  can 
I  conceive  of  a  case  to  which  this  procedure 
is  more  appropriate  than  the  one  at  bar.  The 
complainant  by  itself  and  some  of  its  con- 
stituent companies  has  been  continuously  en- 
gaged in  the  gas  business  since  1823.  A  part 
of  the  land  in  question  has  been  employed  in 
that  business  for  more  than  two  generations, 
during  which  time  the  value  of  land  upon 
Manhattan  Island  has  increased  even  more 


65 


rapidly  than  its  population.  So  likewise  the 
construction  expense  not  only  of  buildings, 
but  of  pipe  systems  under  streets  now  con- 
sisting of  continuous  sheets  of  asphalt  over 
granite,  has  enormously  advanced. 

' '  The  value  of  the  investment  of  any  manu- 
facturer in  plant,  factory,  or  goods,  or  all 
three,  is  what  his  possessions  would  sell  for 
upon  a  fair  transfer  from  a  willing  vendor  to 
a  willing  buyer,  and  it  can  make  no  difference 
that  such  value  is  affected  by  the  efforts  of 
himself  or  others,  by  whim  or  fashion,  or 
(what  is  really  the  same  thing)  by  the  ad- 
vance of  land  values  in  the  opinion  of  the 
buying  public.  It  is  equally  immaterial  that 
such  value  is  affected  by  difficulties  of  repro- 
duction. If  it  be  true  that  a  pipe  line  under 
the  New  York  of  1907  is  worth  more  than  was 
a  pipe  line  under  the  City  of  1827,  then  the 
owner  thereof  owns  that  value,  and  that  such 
advance  arose  wholly  or  partly  from  difficul- 
ties of  duplication  created  by  the  city  itself 
is  a  matter  of  no  moment.  Indeed,  the  causes 
of  either  appreciation  or  depreciation  are 
alike  unimportant,  if  the  fact  of  value  be  con- 
ceded or  proved;  but  that  ultimate  inquiry 
is  oftentimes  so  difficult  that  original  cost 
and  reasons  for  changes  in  value  become  legi- 
timate subjects  of  investigation,  as  checks 
upon  expert  estimates  or  bookkeeping  inaccu- 
rate and  perhaps  intentionally  misleading. 
Cf.  Ames  vs.  Union  Pacific  R.  E.  (C.  C),  64 
Fed.,  at  pages  178,  179.  If  50  years  ago,  by 
the  payment  of  certain  money,  one  acquired  a 
factory  and  the  land  appurtenant  thereto, 
and  continues  to-day  his  original  business 
therein,  his  investment  is  the  factory  and  the 
land,  not  the  money  originally  paid;  and  un- 


m 


less  Ms  business  shows  a  return  equivalent  to 
what  land  and  building,  or  land  alone,  would 
give  if  devoted  to  other  purposes  (having  due 
regard  to  cost  of  change),  that  man  is  engaged 
in  a  losing  venture,  and  is  not  receiving  a  fair 
return  from  his  investment,  i.  e.,  the  land  and 
building.  The  so-called  '  money  value '  of  real 
or  personal  property  is  but  a  conveniently 
short  method  of  expressing  present  potential 
usefulness  and  *  investment'  becomes  mean- 
ingless if  construed  to  mean  what  the  thing 
invested  in  cost  generations  ago.  Property^ 
whether  real  or  personal,  is  only  valuable 
when  useful.  Its  usefulness  commonly  de- 
pends on  the  business  purposes  to  which  it  is 
or  may  be  applied.  Such  business  is  a  living 
thing,  and  may  flourish  or  wither,  appreciate 
or  depreciate;  but,  whatever  happens,  its 
present  usefulness,  expressed  in  financial 
terms,  must  be  its  value. 

**  As  applied  to  a  private  merchant  or  manu- 
facturer the  foregoing  would  seem  elemen- 
tary; but  some  difference  is  alleged  to  exist 
where  the  manufacturer  transacts  his  busi- 
ness only  by  governmental  license — ^^vhether 
called  a  franchise  or  by  another  name.  Such 
license,  however,  cannot  change  an  economic 
law,  unless  a  different  rule  be  prescribed  by 
the  terms  of  the  license,  which  is  sometimes 
done.  No  such  unusual  condition  exists  here, 
and  in  the  absence  thereof  it  is  not  to  be  in- 
ferred that  the  American  Government  in- 
tended, when  granting  a  franchise,  not  only  to 
regulate  the  business  transacted  thereunder, 
and  reasonably  to  limit  the  profits  thereof, 
but  to  prevent  the  valuation  of  purely  private 
property  in  the  ordinary  economic  manner, 
and  the  property  now  under  consideration  is 


67 


as  much  the  private  property  of  this  com- 
plainant  as  are  the  belongings  of  any  private 
citizen.  Nor  can  it  be  inferred  that  snch  gov- 
ernment intended  to  deny  the  application  of 
economic  laws  to  valuation  of  increments 
earned  or  unearned,  while  insisting  upon  the 
usual  results  thereof  in  the  case  of  equally 
unearned,  and  possibly  umnerited,  deprecia- 
tion. 

* '  I  think  the  method  of  valuation  applied  by 
the  report  to  land,  plant,  mains,  services,  and 
meters  lawful.^' 

The  United  States  Supreme  Court,  in  reviewing 
the  case,  no  doubt  fully  conscious'  of  what  it  had 
decided  the  same  day  in  the  Knoxville  case,  ap- 
proved the  views  and  accepted  the  resultant  fig- 
ures of  valuation  reached  by  Judge  Hough,  who 
had,  as  we  have  seen,  adopted  the  method  of  val- 
uation applied  by  the  Master  (212  U.  S.,  19,  52). 

The  Decision  in  Bonbright  vs.  Geary 

Eeference  is  frequently  made  to  the  decision  of 
the  Special  Statutory  Court  convened  under  Sec- 
tion 266  of  the  Judicial  Code  of  the  United  States 
in  Bonbright  vs.  Geary  (210  Fed.  44),  as  sus- 
taining the  deduction  of  ^*  accrued  theoretical  de- 
preciation. ' '  We  do  not  find  such  a  citation  to  be 
warranted.  That  decision  w^as  rendered  in  the 
United  States  District  Court  for  Arizona,  in  1913, 
by  Morrow,  Circuit  Judge,  and  Van  Fleet  and 
Sawtelle,  District  Judges.  The  rates  proceeded 
against  were  gas  and  electric  r^tes  prescribed  by 
the  Corporation  Commission  of  Arizona.  After 
quoting  (210  Fed.  52)  from  the  **  uncontradicted 
statement^'  of  the  expert  engineer  for  the  com- 
pany to  the  following  effect : 


6S 


^^  Condition  of  Property.  The  gas  and  elec- 
tric plants  of  Pacific  Gas  &  Electric  Company- 
are  in  good  and  efficient  condition.  All  parts 
of  the  electric  generating  plant  are  modern, 
up-to-date  installations,  including  turbo-gen- 
erators, water-tube  boilers,  condensers,  oil 
and  lamp  black  burning  apparatus,  etc.  There 
is  an  ample  water  supply  obtained  from  wells. 
The  new  gas  generating  plant  is  a  modern, 
up-to-date,  reversible  Lowe  water  gas  appar- 
atus. Both  plants  are  housed  in  brick  build- 
ings with  steel  truss  roofs  covered  with  fire- 
proof material.  Neither  plant  could  be  im- 
proved upon  anywhere.  The  electric  dis- 
tributing system  is  the  most  modern  type  for 
distribution  in  cities  of  this  character,  and  all 
the  lines,  transformers,  and  service  equip- 
ment are  of  the  latest,  most  improved  type. 
The  gas  distributing  system  includes  ample 
mains,  well  laid,  the  greater  portion  of  w^hich 
have  been  installed  during  the  last  three 
years.  This  distributing  system  is  in  the  best 
possible  condition  and  of  the  most  up-to-date 
qualifications.  The  utility  equipment  of  the 
company  is  also  of  the  latest  design,  including 
automobile  trucks  and  the  latest  office  labor- 
saving  devices. '' 

The  Court,  through  Morrow,  Circuit  Judge, 
said,  along  lines  sustaining  the  views  hereinbefore, 
expressed  as  to  the  proper  interpretation  of  the 
Knoxville  case : 

*^It  would  seem  that,  if  the  plant  is  in  the 
condition  set  forth  in  this  statement,  a 
deduction  of  49  per  cent,  from  its  original 
value  for  depreciation,  or  approximately 
that  percentage,  is  excessive;  but  to  what 
extent  it  is  excessive  we  do  not  now  deter- 
mine.   We  call  attention  to  the  statement 


69 


for  the  purpose  of  referring  to  the  fact  that 
the  plant  appears  to  have  been  kept  in 
repair  and  is  now  in  good  condition.  In 
the  Knoxville  case  the  Supreme  Court  com- 
mended this  method  of  preserving  the  in- 
tegrity of  a  public  service  plant.     *   j^     * 

*^This  brings  us  to  a  peculiar  feature  of 
this  case.  There  was  on  hand  in  the  treas- 
ury of  the  company  at  the  time  of  the  valua- 
tion of  the  plant  the  sum  of  $64,292.67, 
accumulated  for  the  purpose  of  meeting  the 
expense  of  current  repairs  and  for  replac- 
ing such  parts  of  the  property  as  had  been 
worn  out  and  the  life  of  the  part  ended. 
The  fund  had  been  withheld  from  the  stock- 
holders that  it  might  be  used  in  preserving 
the  plant  in  good  condition  and  in  proper 
efficiency.  This  was  good  business  judg- 
ment on  the  part  of  the  officers  of  the  cor- 
poration and  must  be  approved.  Public 
service  corporations  are  to  be  encouraged 
in  maintaining  their  plants  in  a  proper  state 
of  efficiency.  We  are  of  the  opinion  that 
the  Corporation  Conunission  was  in  error 
in  its  estimate  of  depreciation  of  this  plant, 
and  particularly  was  in  error  in  omitting 
this  reserve  fund  from  its  valuation  of  the 
plant, ^^ 


The  Cumberland  Telephone  &  Telegraph  Case 

The  decision  of  the  United  States  Circuit 
Court  in  Cumberland  Telephone  S  Telegraph  Co. 
vs.  City  of  Louisville  (157  Fed.  637,  650;  reversed 
212  U.  S.  414),  does  not  seem  to  warrant  the  fre- 
quent references  made  to  it  by  advocates  of  the 
** accrued  depreciation"  theory.    The  Court  said: 


70 


^*We  have  not  been  able,  from  anything 
said  by  the  Master,  to  see  what  his  reasons 
were  for  the  reduction  of  10  per  cent,  for 
depreciation,  as  shown  in  the  above  extract 
from  his  report,  particularly  as  the  large 
sums  shown  by  him  to  have  been  expended 
for  maintenance  and  reconstruction  had,  as 
he  tells  us,  put  the  plant  in  excellent  con- 
dition and  practically  equal  to  a  new  one, 
and  had  prevented  any  material  change  of 
its  value  during  the  20  months  the  case  was 
before  him.  If  we  eliminate  the  10  per  cent, 
reduction  made  by  the  master  we  find  that 
his  estimate  of  the  value  of  the  plant  would 
be  $1,506,665.09,  which  would  be  $133.88  in 
excess  of  the  original  cost  of  the  plant, 
which  he  found  to  have  been  $1,506,531.21. 
AVe  think  the  reduction  of  10  per  cent,  under 
the  circumstances,  was  in  large  measure  an 
arbitrary  reduction  in  the  sense  that  it  was 
without  an  adequate  basis  in  view  of  the 
large  expenditures  made  to  keep  the  plant 
up  to  the  standard,'' 

California  and  Oklahoma  Decisions  Sometimes  Cited 
as  Adverse  Authority 

The  reports  filed  by  Ex-Judge  H.  M.  Wright  in 
Contra  Costa  Water  Co.  vs.  City  of  Oakland  (113 
Pac.  668)  and  in  Spring  Valley  Water  Co.  vs.  San 
Francisco  (252  Fed.  979)  (1918),  are  often  cited 
as  giving  support  to  the  inclusion  of  provision  for 
** accrued  theoretical  depreciation"  in  utility  rates 
and  the  deduction  of  the  estimated  amount  of 
such  *^ depreciation"  from  the  sum  on  w^hich  the 
fair  return  to  be  earned  by  the  utility  would  other- 
wise be  computed.  Those  who  cite  these  earlier 
discussions  from  the  erudite  pen  of  Judge  Wright 


71 


overlook  the  conclusions  of  his  elaborate  report 
as  Special  Master  in  Pacific  Gas  and  Electric  Co, 
vs.  City  a^id  County  of  San  Francisco,  filed  March 
2,  1920  (Northern  District  of  California;  Second 
Division). 

In  the  case  just  cited,  Judge  Wright  said 
that  in  view  of  recent  literature  and  judicial  de- 
cisions the  whole  subject  must  be  re-examined.  He 
concluded  that  in  a  rate  case,  the  matter  of  de- 
preciation is  a  false  quantity  and  that  the  real 
question  is  ^^When  shall  the  charges  to  provide 
funds  for  replacement  begin  and  endf 

He  said: 

^^  Unlike  tables  of  human  mortality,  tables 
of  the  mortality  of  structural  elements, 
founded  on  the  experience  of  plants  all  over 
the  country,  or  a  table  of  abandonments  in 
the  plant  under  examination,  will,  all  alike, 
be  unsafe  guides  for  prediction  of  future  ex- 
perience. For  certainly,  to  the  extent  that 
past  abandonments  have  occurred  by  reason 
of  obsolescence  or  inadequacy,  there  can  be 
no  uniform  rule,  in  the  nature  of  things,  and 
therefore  no  guide  for  forecast  of  the  future'' 
(page  45). 

Advocates  of  *^  accrued  theoretical  deprecia- 
tion" often  cite  as  authority  in  their  behalf  the 
decision  in  Pioneer  Telephone  &  Telegraph  Co.  vs. 
Westenhaver  (299  Okla.  420)  (1911).  In  so  doing 
they  overlook  the  later  decision  in  Pioneer  Tele- 
phone S  Telegraph  Co.  vs.  State  of  Oklahoma  (167 
Pacific  995),  in  which  the  Supreme  Court  of  Okla- 
homa said,  in  1917: 

**We  are  unable  to  perceive  the  necessity 
for  building  up  a  fund  to  be  used  for  the  pur- 


72 


pose  of  counteracting  a  purely  theoretical  de- 
preciation. The  theory  of  the  Commission 
seems  to  be  that  charges  should  be  made  in 
rates  sufficient  to  counteract  or  prevent  de- 
preciation by  replacements  and  that  where 
replacements  are  thus  fully  provided  for  de- 
preciation is  counteracted." 

The  Superior  Court  of  Pennsylvania  has  re- 
cently reaffirmed  its  decision  respecting  deprecia- 
tion in  Ben  Avon  Borough  vs.  Ohio  Valley  Water 
Company  case  (9  Pa.  Corp.  Kep.  404;  reaffd.  Id,, 
P.  U.  K.  1918  A,  page  161 ;  see,  also,  253  U.  S.  287), 
in  which  the  Pennsylvania  Court  said : 

**  Depreciation,  though  largely  theoretical 
in  its  nature,  which  is  allowed  on  the  repro- 
duction cost,  seems  to  have  a  fixed  place  in 
valuation.  If,  however,  replacements  and  re- 
newals are  amply  provided  for  and  made,  de- 
preciation only  to  a  very  small  extent  takes 
place.  If,  through  depreciation,  the  value  of 
the  property  is  largely  reduced,  the  securities 
which  were  placed  thereon  may  be  unneces- 
sarily reduced  in  value.  As  these  charges 
withdraw  from  the  rate-making  base,  such  de- 
preciation naturally  effects  a  purchase  of  a 
part  of  the  property  for  the  consumer — a 
thing  never  contemplated.  A  rate  for  re- 
newals and  replacements  should  be  provided 
and  expended  for  that  purpose ;  when  that  is 
done,  as  is  the  custom  in  every  utility  con- 
cern, depreciation  is  a  very  small  fractional 
per  cent.  This  should  be  placed  in  a  reserve, 
and  it,  with  renewals  and  replacements,  are 
properly  allowable  in  fixing  a  schedule  of 
rates. ' ' 


73 


Essential  Purposes  of  the  Statute  and  the  Relation  of 
"Depreciation  Charges"  Thereto 

Looking  at  the  matter  from  the  viewpoint  of 
fundamentals,  it  may  be  observed,  at  the  risk  of 
repetition  in  part  of  what  has  already  been  said 
^  herein,  that  the  object  of  statutory  provisions, 
such  as  are  contained  in  Section  20,  and  correlated 
sections  of  the  Act,  is  threefold:  (1)  to  ensure 
to  the  public  good,  safe  service,  through  keeping 
raihvay  property  in  good  repair  and  operating 
efficiency;  (2)  to  protect  the  public  from  unlawful 
and  burdensome  exactions,  and  (3)  to  secure  to 
investors  in  railway  enterprises  a  fair  return  upon 
the  property  employed  in  the  public  service.  The 
object  in  view  cannot  be  accomplished  unless  an 
economically  sound  plan  for  the  maintenance  of 
the  integrity  of  the  property  and  investment 
through  repairs,  renewals  and  replacements  be  set 
up  and  followed.  The  application  of  unsound  and 
fanciful  theories  lea'ds  to  results  most  unjust  to 
all  affected.  The  carrier  or  other  public  utility  is 
at  all  times  entitled  to  a  reasonable  return  on  the 
fair  value  of  its  property,  and  the  user  of  its  ser- 
vice is  entitled  to  service  at  the  lowest  cost  con- 
sistent with  efficiency  of  service,  the  defraying  of 
operating  expenses,  and  the  earning  of  a  fair  re- 
t^turn  on  the  investment. 

The  investment  of  money  in  a  railroad  or  utility 
is  made  to  serve  the  needs  of  particular  communi- 
ties, usually  a  territory  in  course  of  growth  and 
development.  Continuous  and  efficient  service  is 
demanded  and  must  be  provided.  Eepairs  are 
necessary  as  portions  of  units  of  property  are 
worn  in  the  service  of  the  patrons,  and  the  expense 
thereof  must  be  currently  provided  in  the  rate. 
As  time  goes  on,  certain  items  of  property  which 
have  not  been  affected  by  use  or  wear,  must  never- 


74 


theless  be  retired  to  meet  the  growing  demands 
upon  the  system.  Some  are  retired  to  effect  econo- 
mies; others  go  out  because  larger  facilities  are 
needed  or  become  more  economical.  These  proc- 
esses of  repair,  renewal  and  replacement  go  on 
continuously;  their  combined  effect  is  to  per- 
petuate the  railroad  property  as  a  going  concern. 
No  one  thinks  of  a  time  when  the  entire  rolling 
stock,  structures  and  equipment  will  be  retired  or 
go  out  of  service.  The  railway  property  is  per- 
petuated and  its  efficiency  maintained,  and  the 
expense  thereof  borne  by  the  users. 

Additions  to  the  capacity  of  the  system,  exten- 
sions of  its  lines,  etc.,  should  of  course  be  pro- 
vided for  by  the  employment  of  new  capital  in- 
vested by  those  having  the  capital  to  invest  and 
not  by  exactions  from  passengers  or  shippers. 
All  those  expenses  which  are  required  for  what 
are  commonly  know^n  as  repairs  and  which  are 
currently  made  i^  the  every  day  operation  of  the 
system  to  make  good  the  parts  that  actually  wear 
out  in  the  service,  should  be  met  by  the  every  day 
users  of  the  transportation  service  and  provided 
'for  in  the  rates  and  fares  charged.  The  cost  of 
items  of  property  which  are  not  worn  out  in  use, 
but  which  it  may  become  necessary  to  retire  for 
other  reasons,  such  as  increases  in  facilities  to  ac- 
commodate additional  shippers  or  passengers,  or 
to  effect  the  economies  made  possible  by  the  prog- 
ress of  the  art,  is  chargeable  against  the  economies 
resulting  from  such  retirement.   . 

Reasons  Why  the   Cost  of  Retirements   Should  Not 
Be  Anticipated  Through  Accruals  Based 
on  "Life  Tables" 

r  This  may  be  made  concrete  by  saying  that  out- 
side of  such  portions  of  the  rolling  stock,  equip- 
ment, etc.,  as  are  affected  by  w^ear  and  tear  and 


75 


so  are  made  good  by  current  repairs,  the  great 
bulk  and  in  fact  substantially  all  the  major  items 
going  to  make  up  a  railroad  or  utility  property, 
are  not  subject  to  wear  and  tear  and  have  lives 
of  indefinite  duration,  and  are  continued  in  use  in- 
definitely if  the  service  conditions  presented  when 
the  demand  for  service  greatly  increases  do 
not  render  them  inadequate  or  if  economies  and 
betterments  made  possible  by  the  progress  in  the 
art  do  not  make  them  obsolete,  even  though  still 
rendering  their  original  services  at  least  as  eco- 
/^nomically  and  efficiently  as  when  installed.  This 
increase  often  necessitates  the  installation  of 
larger  or  different  units  to  meet  the  increased  de- 
mands, but  otherwise  their  use  goes  on.  For  ex- 
ample, in  a  gas  plant  or  steam-generating  plant 
for  electricity,  the  replacement  of  checker  brick  in 
a  gas  machine,  the  installation  of  new  tubes  in  a 
steam  boiler  or  a  condenser,  the  repairing  of  a 
meter  or  service,  the  painting  of  a  holder  or  a 
building,  the  replacing  of  a  pole,  the  overhauling 
of  a  pump  or  engine,  the  pointing  up  of  a  wall, 
renewal  of  the  slate  or  shingles  on  a  roof,  and 
the  like,  are  all  matters  of  repair  w^hich  are  taken 
care  of  in  the  everyday  operation  of  the  plant 
and  charged  to  its  operating  expenses.  In  this 
way  the  consumer  bears  his  burden  of  maintain- 
ing the  plant  in  condition  to  render  him  service. 
It  is  his  proper  burden  and  should  rightly  be  borne 
by  him  because  it  is  his  use  of  the  service  that 
makes  the  expense  necessary. 

But  when  the  times  comes,  if  it  ever  should 
come,  that  a  length  of  gas  main,  a  purifier  box,  a 
rotary  converter,  or  a  switchboard,  or  a  part  of 
some  such  unit,  would  need  to  be  retired,  such  ex- 
pense should  not  be  put  upon  the  past  consumers, 
because  their  use  has  not  made  the  retirement 
necessary.    Use  has  not  lessened  the  efficiency  of 


76 


these  units  or  created  the  conditions  of  increased 
demand,  greater  economies,  or  progress  in  the  art, 
which  lead  to  their  retirement.  The  mere  expira- 
tion of  time  has  not  created  these  conditions, 
which  bear  no  relation  to  any  fanciful  **  expired 
portion''  of  an  '^estimated  life''  of  the  property 
to  be  retired.  The  burden  or  expense  should,  as 
was  pointed  out  in  the  opinion  in  the  Netv  York  & 
Quee^is  Gas  Company  case,  quoted  from  on  pages 
26-32,  ante,  be  met  in  another  way  from  that  fol- 
lowed as  to  current  repairs,  and  the  only  just  way 
to  meet  it  is  by  placing  it  upon  those  who  benefit 
by  the  change,  to  wit,  the  larger  body  of  consum- 
ers, whose  present  and  prospective  requirements 
compel  the  change,  and  it  is  a  change  which 
would  not  be  made  were  not  the  improvements  and 
economies  effected  thereby  to  operate  to  their 
benefit.  The  expense  of  such  retirement  adds 
nothing  to  the  rate,  because  being  offset  by  econo- 
mies it  does  not  unduly  burden  the  operating  ex- 
penses. If  collected  in  advance,  however,  it  would 
mean  increased  rates  to  those  who  might  never  de- 
rive any  benefit  therefrom. 

Concrete  Illustration  of  the  Reasons  Why  the  Rate 

Should  Not  Be  Burdened  With  Charges 

Anticipating  Future  Retirements 

That  the  method  above  outlined  produces  a 
price  such  as  the  consumer  is  entitled  to  and  may 
demand,  and  which  does  not  overcharge  him  to 
the  advantage  of  some  future  consumer,  may  best 
be  illustrated  by  citing  a  typical  case,  which  any 
manufacturer  or  utility  would  recognize  as  char- 
acteristic of  the  business  of  producing  and  selling 
commodities  and  service: 

Smith  embarks  in  the  business  of  producing  a 
commodity  involving  the  employment  of  plant  and 


77 


equipment  representing  an  investment  of  $100,- 
000. 

For  all  that  he  knows  to  the  contrary,  the  plant 
and  equipment  in  which  he  has  invested  his  capi- 
tal may  be  operated  perpetually,  if  maintained 
by  repairs,  renewals  and  replacements,  as  occa- 
sion therefor  arises. 

He  can  produce  500,000  articles  which  will  sell 
for  ten  cents  apiece. 

His  gross  receipts  are  $50,000. 

His  expenses  are  $40,000. 

His  profit  is  $10,000,  or  ten  per  cent,  upon  his 
investment. 

His  investment  is  represented  by : 

Land $10,000 

Structure 60,000 

Machinery 30,000 

At  the  end  of  three  years,  he  learns  that  an  in- 
ventor has  improved  upon  the  machinery  required 
for  the  production  of  this  particular  article  and 
upon  investigation  ascertains  that  by  the  installa- 
tion of  the  new  machinery,  at  a  cost  of  $30,000,  he 
can  save  in  the  operating  expenses  $10,000  per 
annum.  The  new  machinery  is  installed  and  the 
machinery  with  which  he  began  business,  and 
which  is  as  good  as  it  ever  was,  and  which  he 
might  continue  operating  perpetually,  is  with- 
drawn from  service,  with  the  result  that  of  his 
gross  income  of  $50,000  there  is  required : 

For  expenses $30,000 

For  Amortization  (3  years) .  10,000 
Leaving  a  profit  of 10,000 

There  is  no  more  reason  than  there  was  in  the 
first  instance  for  his  speculating  as  to  the  time 


78 


when  new  discoveries  or  inventions  will  make  it 
profitable  for  him  to  displace  his  new  equipment. 
Nevertheless,  after  the  expiration  of  another  three 
years,  he  again  learns  that  improvements  have 
been  made  by  an  inventor  in  the  type  of  machin- 
ery required  for  the  manufacture  of  his  particular 
article,  which  will  reduce  his  expenses  $10,000  per 
annum.  The  new  machinery  is  installed  at  a  cost 
of  $30,000  and  the  machinery  theretofore  used  is 
withdrawn  from  service. 

At  the  same  time  he  is  able,  as  the  result  of  the, 
first  supersession,  to  reduce  the  price  of  his  com- 
modity from  ten  cents  per  article  to  eight  cents 
per  article,  and  in  the  seventh  year  his  revenue 
statement  would  be  as  follows : 

Gross  receipts $40,000 

Expenses 20,000 

For  Amortization  (3  years) . .   10,000 
Leaving  a  profit  of 10,000 

At  the  end  of  the  ninth  year,  he  reduces  the 
price  of  his  commodity  to  six  cents  per  article  and 
thereafter  until  and  unless  some  further  inven- 
tion justifies  or  necessitates  another  superses- 
sional  transaction,  his  annual  operations  will  be  as 
follows : 

Gross  receipts $30,000 

Expenses 20,000 

Leaving  a  profit  of 10,000 

During  the  entire  ten  years,  there  was  no 
change  in  the  amount  of  his  profit.  During  the 
first  six  years  there  was  no  change  in  his  price. 
The  cost  in  the  first  three  years  was  his  operating 
expenses  of  $40,000.  During  the  second  three 
years  his  operating  expenses,  including  as  a 
proper  element  of  cost  the  amortization  of  invest- 
ments in  the  superseded  machinery,  were  ($30,000 


79 


plus  $10,000)  $40,000.  During  the  next  three 
years  (7th,  8th  and  9th)  his  annual  exj^enses  were 
($20,000  plus  $10,000)  $30,000,  which  gave  him, 
notwithstanding  a  decrease  of  two  cents  in  the 
selling  price  per  article  of  his  commodity,  a  profit 
of  $10,000. 

In  the  tenth  year,  as  stated,  he  was  able  to  re- 
duce the  price  of  the  article  two  cents  more,  to  six 
cents,  reducing  his  gross  revenue  to  $30,000  and 
the  amortization  of  the  last  withdrawal  having 
been  completed,  his  expenses  amounting  there- 
after to  only  $20,000,  his  profits  continued  at  the 
rate  of  $10,000  per  annum  on  his  investment  of 
$100,000. 

For  the  purpose  of  presenting  the  illustration  m 
its  simplest  form,  the  elements  of  interest  in  con- 
nection with  the  process  of  amortization  and  of 
scrap  value  of  withdrawn  machinery  have  been 
disregarded.  The  fact  that,  in  order  to  provide 
for  the  elements  of  scrap  value  and  interest  on 
the  unamortized  investment  during  the  period  of 
amortization,  the  annual  economy  would  have  to 
be  a  little  greater,  or  smaller,  or  the  amortiza- 
tion period  a  little  longer,  or  shorter,  than  the  il- 
lustration indicates,  has  no  relevancy  to  the  prin- 
ciple involved. 

Had  this  manufacturer  been  so  misguided  as  to 
adopt  so-called  *^  theoretical  depreciation ''  as  a 
basis  for  determining  the  cost  of  his  product  and 
had  he  possessed  actual  powers  of  clairvoyance 
and  been  able  to  forecast  that  at  the  expiration  of 
the  first  three  years  his  machinery  would  be  su- 
perseded, had  he  seen  fit  to  disregard  the  fact 
that  the  supersession  would  pay  for  itself ,  and  un- 
dertaken to  collect  it  in  advance,  his  selling  price 
for  the  first  three  years  would  have  been  twelve 
cents  per  article  produced,  instead  of  ten  cents. 


80 


Not  only  would  he  have  been  robbing  Peter  (his 
customers  during  the  first  three  years)  to  pay 
Paul  (his  customers  for  the  second  three  years) 
but,  for  reasons  above  stated,  he  would  have  put 
himself  out  of  business  altogether,  since  it  is  im- 
possible to  conceive  that  all  of  his  competitors 
would  be  guilty  of  similar  folly. 

The  "Woodpile"  and  "Fleet-of-Taxicabs"  Illustrations 
As  Used  by  the  Depredationists 


n 


The  *' stock''  arguments  of  the  advocates  of 
accrued  theoretical  depreciation"  are  predicated 
on  what  may  be  termed  the  'Svoodpile  illustra- 
tion'' and  the  *^  fleet  of  taxicabs"  illustration. 
These  fallacious  illustrations  were  testified  to  at 
length  by  Milo  E.  Maltbie  and  other  champions 
of  the  depreciation  theory  in  Consolidated  Gas  Co. 
vs.  Newton,  et  al.  (see  pages  32  to  36,  ante),  as 
well  as  in  New  York  S  Queens  Gas  Company  vs. 
Newton,  et  al.  (see  pages  26  to  32,  ante);  and  so 
were  taken  up,  analyzed,  and  refuted  in  detail, 
before  the  Special  Master  in  both  those  cases. 
We  quote  from  the  resume  of  that  argument,  as 
set  forth  in  the  brief  submitted  to  Judge  Learned 
Hand  in  the  Consolidated  Gas  Company  case  (for 
his  opinion,  see  pages  32  to  36,  ante): 

**0n  page  13,316  of  the  printed  record.  Pro- 
fessor Maltbie  confused  a  gas-plant  with  a 
wood-pile  and  gave  it  as  his  opinion  that  the 
plant  disappears  in  the  same  manner  as  a 
wood-pile  disappears  as  the  result  of  *  putting 
a  chunk  of  wood  into  your  stove  right  along,' 
and  adds,  Hhat  wood-pile  is  depreciating  in 
value.'  The  absurdity  of  this  illustration  is 
at  once  apparent  to  the  sound  thinker.  A 
gas  plant  is  not  treated  as  a  wood-pile  is 
treated.     There  is  no  analogy  between  the 


81 


withdrawal  of  wood  from  a  pile  and  the  oper- 
ation of  a  gas-plant.  No  *  chunks'  of  plant 
are  taken  out  and  consumed  for  fuel  nor  for 
any  other  purpose.  On  the  other  hand,  if  any 
part  of  a  plant  is  taken  out  of  service  it  is 
immediately  replaced — otherwise  the  plant 
could  not  operate.  If  the  wood-pile  were  sim- 
ilarly maintained  it  would  never  diminish 
either  in  dimensions  or  in  value.  In  other 
words  the.  gas-plant  is  like  a  wood-pile  to 
which  a  stick  of  wood  is  added  every  time 
one  is  withdrawn. 

*  *  On  page  13,137  of  the  printed  record,  Pro- 
fessor Maltbie  endeavored  to  improve  upon 
the  wood-pile  analogy  by  a  clumsy  attempt 
to  expound  the  sophistries  by  which  it  is  un- 
dertaken to  demonstrate  that  a  unit  of  equip- 
ment when  new,  produces  a  certain  store  of 
productivity  which  diminishes  progressively 
during  its  period  of  life  expectancy  and  is 
finally  reduced  to  zero.  He  said,  *When  you 
start  out  with  anything  there  is  a  certain 
amount  of  service  it  will  render  and  it  has 
value  because  it  will  render  that  service. 
Now,  as  time  goes  on  the  amount  of  remain- 
ing service  which  that  thing  will  render  de- 
creases as  you  go  along  and  consequently  the 
value  of  that  commodity,  or  article,  or  plant, 
whatever  it  may  be,  decreases  in  value  be- 
cause the  person  who  owns  it  has  a  shorter 
and  shorter  time  to  get  service  out  of  that 
plant  or  anything.' 

Fallacy  of  the  "Wood-pile"  Illustration 

**The  falsity  of  this  theory  lies  in  the  as- 
sumption that  a  gas-plant  as  a  whole,  or  even 
95   per  cent,   of  the  units  contained  in  it. 


82 


actually  have  any  ascertainable  limit  to  pro- 
ductivity. In  other  Words,  their  capacity  to 
produce  runs  to  infinity.  It  is  only  what  may 
be  termed  the  ^wearing  parts'  of  a  gas-plant 
to  which  may  be  attributed  any  limitation  of 
their  productivity,  but  the  renewal  and  re- 
placement of  such  wearing  parts  constitutes 
a  proper  item  of  operating  cost  and  does  not 
in  any  way  affect  the  continuing  productivity 
of  the  plant  as  a  whole.  The  fact  that  the 
growth  of  a  utility's  business  or  the  develop- 
ment in  the  art  of  producing  artificial  gas 
may  require  that  in  the  interests  of  economy 
and  efficiency  units  of  equipment,  which  would 
otherwise  last  forever,  are  displaced,  has 
nothing  to  do  with  the  productivity  of  the 
unit.  It  is  not  because  its  period  of  productive 
usefulness  has  expired  that  it  is  withdrawn 
from  service,  but  that  the  interests  of  economy 
and  efficiency  may  be  conserved  that  units  of 
equipment  are  withdrawn.  Such  withdrawals, 
however,  uniformly  furnish  their  own  eco- 
nomic justification.  The  loss  involved  in  such 
withdrawals  if  too  large  to  charge  against  the 
revenue  for  the  year  in  Avhich  the  withdrawal 
occurs  should  be  charged  against  the  revenues 
thereafter  until  the  loss  is  amortized  out  of 
the  earnings.  There  is  no  good  nor  plausible 
excuse  for  providing  for  the  loss  involved  in 
such  withdrawals  in  advance  of  their  occur- 
ring. The  reasons  are  several  and  obvious. 
Aside  from  the  fact  that  the  rates  paid  by  the 
users  of  an  improved  service  should  bear  the 
burden  of  improving  the  service  (and  this 
does  not  imply  that  it  is  ever  necessary  to 
increase  a  rate  in  order  to  amortize  the  loss 
involved  in  a  replacement  for  obsolescence  or 
inadequacy,  for  no  instance  of  the  kind  is 
recorded),  is  the  impossibility  of  forecasting 


83 


in  respect  of  what  unit  of  plant  or  equipment 
obsolescence  or  inadequacy  will  ultimately 
disclose  itself  and  the  consequent  impossi- 
bility of  adjusting  the  provision  to  the  neces- 
sity— and  even  if  this  could  be  done,  there 
would  still  be  no  justification  for  imposing 
upon  the  users  of  a  given  unit  of  plant  or 
equipment  the  obligation  of  providing  in  ad- 
vance for  the  loss  involved  in  its  ultimate 
displacement  with  no  assurance  that  the  then 
rate-payer  would  ever  benefit  by  the  trans- 
action. In  other  words,  an  attempt  to  provide 
in  advance  for  future  obsolescence  and  inade- 
quacy (which  are  the  only  causes  for  which 
units  of  plant  and  equipment  are  displaced) 
would  involve  not  only  speculation  as  to  the 
amount,  but  would  lead  inevitably  to  a  bur- 
densome rate  and  to  the  accumulation  of  a 
useless  fund  which  could  never  be  used  for 
the  purpose  for  which  it  was  alleged  to  have 
been  created. 

**  Since  the  rate  for  service,  if  properly 
adjusted  to  cover  the  operating  expenses,  in- 
cludes a  fair  return  on  the  investment,  in- 
cluding the  cost  of  maintaining  the  property 
by  renewals  and  replacements  as  and  when 
necessary,  and  providing  the  amount  neces- 
sary to  reimburse  the  company  for  the  loss  in- 
volved by  renewals  and  replacements  on  ac- 
count of  obsolescence  and  inadequacy,  it  is 
obvious  that  no  parts  of  the  plant  diminish  in 
value  so  long  as  they  are  in  use.  The  amount 
recoverable  in  the  rates  for  renewals  and  re- 
placement of  plant  for  obsolescence  and  in- 
adequacy is  the  amount  in  each  case  of  the 
investment  in  the  unit  of  the  plant  or  equip- 
ment retired.  Its  value,  therefore,  suffers 
no    diminution    or    impairment    during    the 


84 


period  that  it  is  in  use.  The  investor  buys  a 
plant  which  becomes  second-hand  the  moment 
it  is  put  in  service.  Theoretically,  it  has  lost 
value,  actually  it  has  lost  nothing,  and  the 
investment  remains  intact.  In  fact,  the  in- 
vestment is  in  the  plant  as  it  may  be  found 
at  any  time  during  the  period  of  its  opera- 
tion. The  idea  that  something  more  than  the 
cost  of  maintaining  it  should  be  collected  in 
the  rates  in  order  to  maintain  the  investment 
unimpaired  has  no  basis  in  fact  nor  in  eco- 
nomics. The  absurdity  of  the  theory  that  an 
investment  in  gas-plant  becomes  progressive- 
ly impaired  and  must  be  compensated  for  by 
the  accumulation  of  unnecessary  funds  and  the 
charging  of  an  unnecessarily  high  rate  for  the 
service  is  best  demonstrated  by  considering 
the  investment  made  in  the  distributing  sys- 
tem. When  a  company  has  removed  a  nec- 
essary amount  of  pavement  and  excavated  a 
trench  four  feet  deep  and  has  installed  there- 
in a  gas-main  and  has  dug  laterals  and  made 
house  connections  and  has  then  refilled  the 
trench  and  repaved  the  street-opening  and 
has  expended  in  this  process  say  $1,000,000, 
it  has,  in  substance,  thrown  that  amount  of 
money  away,  except  as  the  law  recognizes 
that  the  amount  invested  was  invested  in  good 
faith  to  enable  the  utility  to  render  a  service 
in  accordance  with  its  franchise  obligations, 
and  that  upon  the  amount  invested  it  is  en- 
titled to  earn  a  return  so  long  as  the  invest- 
ment remains  in  the  property  and  is  not  re- 
funded to  the  utility.  So  far  as  worth  or 
value  is  concerned,  independently  of  the  fran- 
chise and  the  legal  rights  of  the  company  in 
the  premises,  the  buried  mains  and  services 
have  no  value  whatsoever.  It  would  cost  a 
great  deal  more  to  recover  the  pipe  thati  it 


V 


85 


was  worth.  It  would  cost  more  to  recover 
it  than  it  cost  to  bury  it.  If  the  questions 
of  worth  and  value  are  to  be  considered  in- 
dependently of  the  question  of  the  investment, 
then  the  utility  should  collect  from  its  pros- 
pective consumers  the  cost  of  installing  the 
mains  and  services  before  they  are  installed, 
Avhich  would,  of  course,  be  impossible.  The 
thing  has  but  to  be  stated  to  disclose  the  non- 
sense of  it,  and  if  it  is  considered  that  such 
an  investment  may  be  made  by  a  gas  company 
.  with  safety  and  propriety,  then  there  is  no 
ground  upon  which  at  any  time  any  impair- 
ment of  the  investment  may  be  alleged  as 
long  as  the  mains  and  services  continue  to 
perform  their  function  of  conveying  gas  to 
consumers.  Every  dollar  thereafter  expended 
'Ion  such  mains  and  services  becomes  either  a 
/ 1  capital  charge  or  an  operating  expense.  If 
it  becomes  necessary,  in  order  to  meet  a  de- 
mand for  a  volume  of  gas  in  a  particular  sec- 
tion, the  necessity  for  which  could  not  be  fore- 
seen, to  provide  additional  main  capacity,  the 
problem  would  be  whether  it  would  be  better 
to  install  an  additional  main  to  the  one 
already  in  use  and  of  perhaps  a  correspond- 
ing size,  involving  the  maintenance  and  up- 
keep of  two  mains  instead  of  one,  or  of  in- 
stalling a  single  main  of  sufficient  capacity  to 
meet  the  demand  and  withdrawing  the  old 
main  from  service.  The  economic  question 
presented  in  such  a  case  is  whether  to  make 
an  additional  capital  investment  of  a  given 
sum  and  charge  against  the  revenue  derived 
from  the  additional  business  to  be  obtained 
from  the  additional  main  capacity  the  interest 
on  the  capital  and  the  cost  of  maintaining 
the  main,  or  of  amortizing  the  capital  invest- 
ment in   the   old  main,   installing   a   larger 


86 


main  and  obtaining  from  the  earnings  of  the 
larger  main  the  amount  necessary  to  maintain 
a  single  main  instead  of  two  mains,  to  cover 
the  amortization  cost  in  the  main  withdrawn 
and  to  pay  a  return  upon  the  capital  invested 
in  the  single  main.  The  problem,  when  solved 
in  accordance  with  the  facts  disclosed  in  the 
particular  instance,  adds  nothing  to  the  rates. 
The  company  has  recovered — probably  out  of 
the  earnings  for  the  current  year,  and  cer- 
tainly out  of  the  earnings  for  that  and  one  or 
two  subsequent  years — the  amount  of  its  in- 
vestment in  the  discarded  main  and  the  entire 
incident  discloses  no  ground  whatever  for 
the  accumulation  of  any  reserves  nor  for  the 
application  of  any  theory  of  depreciation. 

^^The  proper  method  of  dealing  with  a  case 
of  obsolescence  may  be  briefly  illustrated  by 
citing  the  case  of  one  of  the  Consolidated  Gas 
Company's  affiliated  companies  which,  in 
addition  to  doing  a  gas  and  electric  business, 
operated  a  trolley  line.  Its  equipment  con- 
sisted of  the  conventional  surface  cars.  The 
proposition  was  made  by  the  engineering 
staff  that  a  new  type  of  cars  known  as  the 
^one-man-car'  could  be  substituted  advan- 
tageously for  those  in  use  and  that  the  econo- 
mies resulting  from  the  saving  in  the  use  of 
electric  current  required  to  operate  the  cars 
and  in  the  wages  of  one  man,  would  suffice  to 
amortize  the  investment  in  the  old  cars  within 
a  period  of  three  years.  Instructions  were, 
therefore,  given  to  dispose  of  the  old  cars  at 
the  best  price  which  could  be  obtained  for  them 
and  to  charge  the  loss  involved  in  their  with- 
drawal from  service  to  a  capital  account  en- 
titled *^ Unamortized  investment  in  cars  with- 
drawn from  service;"  to  buy  the  new  cars 


87 


and  charge  them  to  capital  account  and  to 
charge  against  the  operating  expenses  and 
credit  to  the  unamortized  investment  in  the 
old  cars  the  amount  of  estimated  savings,  so 
as  to  amortize  the  balance  of  this  account 
within  a  period  of  three  years.  No  change 
was  necessary  in  the  rates  in  order  to  effect 
the  result.  This  case  is  typical  of  what  has 
been  going  on,  in  respect  of  all  classes  of  pub- 
lic service  corporations,  including  railroads 
throughout  the  country,  for  the  last  half  cen- 
tury. The  method  of  bookkeeping  may  have 
differed  and  different  terminology  may  have 
been  used,  but  the  substance  and  effect  of  the 
transaction  was  substantially  the  same. 

**0n  page  13,335  of  the  printed  record,  the 
Master  asked:  *How  is  the  public  interested 
so  far  as  the  cost  of  gas  to  the  public  is  con- 
cerned F  and  then  after  Maltbie  stated  that 
there  is  depreciation  notwithstanding  the  fact 
that  a  plant  or  property  may  be  rendering 
sufficient  service  at  the  time  (p.  13,336),  the 
Master  said:  *He  is  entitled  to  have  a  nor- 
mally efficient,  up-to-date,  economically  op- 
erated plant,  isn't  heV 

*^It  is  to  be  emphasized  that  what  the  Mas- 
ter described  is  exactly  what  the  investor  has 
put  his  money  into.  It  represents  his  invest- 
ment unimpaired  and  undiminished  by  any 
theory  of  expired  life,  in  other  words,  by  so- 
called  *  *  accrued  depreciation. ' ' 

**0n  page  13,377  of  the  printed  record,  in 
answering  the  Master's  question  as  to  re- 
newals and  replacements  and  their  being  pro- 
vided for  in  the  rates ,  Professor  Maltbie 
said:  *I  cannot  see  that  they  should  be  al- 
lowed for  those  repairs  and  disregard  the 
other'  (depreciation)  *  because  the  two  things 


ss 


have  got  to  be  taken  together/  This  is  not 
true.  They  have  not  got  to  be  considered  to- 
gether and  should  not  be  taken  together.  The 
only  provision  required  in  order  to  continue 
serving  the  public  until  the  crack  of  doom  is 
that  for  maintenance  and  repairs,  and  nothing 
else. 

The  Analogy  to  a  "Fleet  of  Buses" 

**The  witness  Maltbie  was  asked  by  coun- 
sel for  the  defendant  Newton  to  explain  in 
his  own  way  as  to  Hhe  value  of  depreciation 
as  applicable  to  a  bus  and  a  fleet  of  buses.' 
The  explanation  which  follows  furnishes  a 
striking  illustration  of  the  disingenuous  cas- 
uistry of  the  professional  depreciationist.  He 
did  not  take  a  single  bus  because  he  knows 
that  the  absurdity  of  a  computation  applied 
to  a  single  bus  would  disclose  itself  imme- 
diately. He  does  not  even  take  ten  buses  and 
work  out  his  depreciation  theory  as  applied 
thereto,  but  undertakes  to  make  the  compu- 
tation more  complexed  and  involved  by  as- 
suming that  at  the  expiration  of  every  year 
new  buses  are  added  to  the  fleet.  To  put  the 
matter  simply  and  to  show  why  the  owner  of 
a  single  bus  would  handle  his  individual 
problem  differently  from  the  owner  of  a  fleet 
of  buses  and  to  show  why  in  neither  case,  nor 
in  the  case  of  a  gas  company,  there  is  any 
excuse  for  using  a  bogus  formula  designed  for 
the  purpose  of  finding  something  that  does 
not  exist,  it  is  only  necessary  to  explain  that 
the  provident  operator  of  a  single  taxi-cab, 
who  expected  to  continue  in  business  after  his 
cab  became  inadequate  or  obsolete,  would  set 
aside  out  of  his  earnings  and  deposit  in  the 
bank  such  a  sum,  periodically,  as  would,  at 


89 


compound  interest,  equal  the  difference  be- 
tween the  amount  he  would  be  able  to  obtain 
for  his  old  cab  and  the  amount  he  would  have 
to  pay  for  a  better  one.  No  one  would  ques- 
tion his  right  to  collect  in  his  fare  the  amount 
necessary  to  provide  by  the  sinking  fund 
method  for  the  loss  due  to  the  obsolescence 
or  inadequacy  of  his  cab  as  nearly  as  he  could 
compute  it.  No  one  would  have  the  temerity 
to  question  his  right,  in  the  meantime,  to  col- 
lect a  uniform  fare  for  the  use  of  his  cab.  It 
w^ould  be  difficult  to  conceive  of  a  situation 
where  the  operator  of  a  taxi-cab  would  have 
to  disclose  to  a  prospective  customer  the 
period  of  life  expectancy  of  his  cab,  the  per- 
centage of  such  life  expectancy  which  had 
elapsed,  and  have  his  customer  compute  by  a 
bogus  formula  called  *  straight  line  deprecia- 
tion' the  extent  to  which  his  fare  should  be 
reduced  below  that  which  he  was  entitled  to 
charge  when  his  cab  was  new. 

**The  owner  of  a  fleet  of  ten  cabs  is  under 
no  obligation  to  increase  the  number  of  cabs 
he  has  in  service.  If  he  started  with  a  fleet 
of  ten  cabs  he  would  probably  have  a  great 
deal  of  trouble  during  the  first  year  in  mak- 
ing both  ends  meet.  Two  or  three  years  would 
elapse  before  his  profits  became  great  enough 
for  him  to  set  aside  in  the  bank,  at  interest, 
a  sum  designed  to  maintain  by  replacements, 
when  necessary,  a  cab  which  became  obsolete 
or  inadequate.  By  no  stretch  of  the  imagina- 
tion can  it  be  assumed  that  his  ten  cabs  would 
become  obsolete  or  inadequate  simultane- 
ously, or  that  they  would  all  be  subjected  to 
identically  the  same  vicissitudes  of  vehicular 
operation.  Furthermore,  he  would  control 
his  impulse  to  replace  his  cabs  in  accordance 
with  his  ability  to  do  so  out  of  his  earnings. 


90 


*'The  results  of  the  actual  operation  of  his 
fleet  would  probably  spread  his  cab  renewals 
over  a  period  of  several  years,  so  that  each 
year  he  would  have  to  provide,  out  of  his 
savings  bank  fund  and  out  of  current  earn- 
ings, the  amount  necessary  to  replace  a  dis- 
carded cab,  which  would  probably  be  sold  to 
some  one  less  fortunate  and  who  operated  in  a 
less  exacting  district  than  he.  With  these 
financial  problems  which  he  has  to  solve  the 
public  has  no  concern.  He  performs  his  pub- 
lic obligation  when  he  provides  transporta- 
tion at  a  rate  not  exceeding  the  statutory 
limit,  with  a  cab  which  will  hold  together 
long  enough  to  complete  the  trip.  The  fact 
that  he  has  accumulated  a  sum  in  the  bank  to- 
ward the  replacement  of  his  equipment,  which 
might  be  large  or  small  accordingly  as  he  is 
fortunate  or  unfortunate,  provident  or  im- 
provident, could  not  be  used  as  an  argument 
in  favor  of  a  diminution  of  the  investment  in 
the  taxicabs  upon  which  he  is  entitled  to  earn 
a  return.  If  he  has  set  aside  any  money  for 
this  purpose,  it  is  in  the  nature  of  a  sinking 
fund  and  the  authorities  are  perfectly  clear 
that  a  reserve  created  upon  the  sinking  fund 
basis  may  not  be  deemed  as  a  measure  of  de- 
preciation for  any  purpose.  It  remains  to  be 
asserted  by  any  one  who  speaks  authorita- 
tively, or  understandingly,  that  taxicab  fares 
should  be  adjusted  to  conform  to  so-called 
*  theoretical  depreciation'  computed  on  the 
so-called  *  straight-line '  method. 

**In  the  case  of  a  corporation  such  as  a  gas 
company,  with  plant  and  equipment  made  up 
of  units  whose  life,  except  for  obsolescence  and 
inadequacy,  would  extend  to  infinity,  no  rea- 
son discloses  itself — or  ever  has  disclosed  it- 


91 


self — for  the  creation  and  maintenance  even 
of  a  sinking  fund  for  the  replacement  of  prop- 
erty. As  has  already  been  made  clear,  the 
incident  of  obsolescence  and  inadequacy  fur- 
nishes no  excuse  for  burdening  the  rates  for 
the  purpose  of  creating  reserves  against 
which  the  loss,  due  to  obsolescence  and  inade- 
quacy, may  be  charged.  The  reason  is  that 
the  rates,  without  such  a  burden,  are  adequate 
to  cover  the  operating  expenses  and  maintain 
the  property  and  pay  a  fair  return  on  the  in- 
vestment indefinitely.  The  rates  without  such 
a  burden  are  sufficient  to  take  care  of  obso- 
lescence and  inadequacy  as  it  occurs  because 
the  ultimate  effect  of  replacement  for  obso- 
lescence and  inadequacy  is  to  reduce  the  cost 
and,  eventually,  to  reduce  the  rates. 

**It  cannot  be  alleged  in  respect  of  the  va- 
rious units  of  plant  and  equipment  of  the  Con- 
solidated Company  that,  taken  collectively, 
they  are  in  any  worse  condition  physically 
than  they  were  ten  or  twenty  or  thirty  years 
ago,  or  at  any  other  period  in  the  company's 
history.  As  a  matter  of  fact  they  were  never  in 
better  condition  nor  rendered  more  efficient 
and  economical  service  than  they  are  render- 
ing to-day,  and  their  productivity  is  greater 
per  dollar  of  investment  than  it  was  thirty, 
or  twenty,  or  ten  years  ago. 

**It  cannot  be  alleged  in  respect  of  the  plant 
and  equipment  of  the  Consolidated  Company, 
taken  as  a  whole,  that  any  calculable  percen- 
tage of  any  determinable  period  of  life  ex- 
pectancy has  expired.  Taken  collectively,  the 
plant  will  last  forever.  Its  life  may  be  per- 
petuated to  infinity  by  the  renewal  and  re- 
placement of  parts  subject  to  wear  and  tear. 
Its  life,  like  that  of  the  franchise  under  which 


92 


it  is  operated,  is  perpetual.  It  cannot  be 
alleged  that  the  investment  in  the  plant  and 
equipment  of  funds  obtained  from  whatsoever 
source  is  impaired  by  any  physical  or 
economical  process,  as  for  example  by  lack  of 
newness.  The  plant  as  it  is  to-day  is  the 
plant  in  which  the  funds  have  been  invested. 
It  cannot  be  alleged  in  respect  of  the  invest- 
ment of  the  Consolidated  Company  that  there 
has  occurred  what  is  termed  by  false  theorists 
*  capital  consumption.'  Such  a  thing  is  not 
possible  in  the  case  of  a  public  utility  like  the 
complainant.  Unlike  the  wood-pile,  the 
plant  and  equipment  are  not  consumed.  Units 
of  plant  and  equipment  are  being  withdrawn 
only  to  be  replaced  immediately  by  other 
units,  by  w^hich  means  the  investment  is  kept 
intact.  It  cannot  be  alleged  that  the  Consoli- 
dated Company  has  accumulated  a  useless  re- 
serve disguised  as  a  depreciation  reserve  or 
as  a  reserve  for  the  maintenance  of  its  prop- 
erty. It  has  been  the  Consolidated  Com- 
pany's contention  throughout  that  no  such 
reserve  should  be  accumulated ;  that  it  is  con- 
trary to  public  policy;  that  the  companies  do 
not  require  or  desire  it  and  that  there  should 
not  be  permitted  in  the  rates  any  such  re- 
serve, since  it  involves  an  unnecessary  en- 
hancement thereof  over  the  actual  cost  of  the 
service,  at  the  expense  of  the  consumer,  from 
which  he  derives  no  benefit." 

Other  Decisions  of  Courts  and  Commissions 

If  further  authority  be  needed  for  such  a 
handling  of  this  problem  as  has  been  hereinbefore 
proposed,  in  the  railroad  as  well  as  the  public 
utility  field,  it  would  seem  to  be  afforded  by  Kan- 
sas City  Southern  Railway  Company  vs.  United 


93 


States,  231  IT.  S.,  423,  already  referred  to  on 
page  57,  ante.  A  railroad  had,  according  to  the 
facts  before  the  Supreme  Court  in  that  case, 
been  constructed  to  meet  the  needs  of  a  new  coun- 
try with  the  minimum  investment  necessary.  As 
a  result,  there  were  steep  grades.  With  the  de- 
velopment of  the  country  and  increased  traffic  it 
was  found  more  economical  to  build  a  new  divi- 
sion with  lower  grades  and  to  abandon  parts  of 
the  old  line.  The  company  issued  bonds,  with  the 
proceeds  of  which  it  made  the  new  construction. 
The  question  was  how  the  cost  of  the  new  line  re- 
placing the  line  abandoned  should  be  provided  for 
and  paid.    The  Supreme  Court  said,  at  page  451 : 

^^The  road  or  structures  have  to  be  re- 
placed with  stronger  or  more  efficient  instru- 
mentalities. Abandonments  occasioned  by 
changes  of  this  character  are,  therefore, 
chargeable  to  future  earnings,  for  the  reason 
that  the  improved  condition  of  the  road  is  not 
only  designed  to  meet  the  demands  of  the  fu- 
ture, but  presumably  will  result  in  economo- 
mies  of  operation,  and  so  the  resulting  bene- 
fits will  be  reaped  by  those  who  hold  the  stock 
of  the  company  in  the  present  and  in  the  fu- 
ture.  *    *   * 

^^In  case,  however,  the  amount  is  so  large 
that  its  inclusion  in  a  carrier  ^s  operating  ex- 
penses for  a  single  year  would  unduly  burden 
the  operating  expense  account  for  that  year, 
the  carrier  may,  if  so  authorized  by  the  Com- 
mission, distribute  the  cost  throughout  a 
series  of  years.'' 

In  the  Havre  de  Grace  Bridge  case  (Havre  de 
Grace  and  P.  Bridge  Co.  vs.  Towers,  103  Atl.,  319 ; 
P.  U.  E.,  1918D,  page  484),  the  Maryland  Court  of 
Appeals  characterized  as  ''mere  guess  work"  all 


94 


attempts  to  foretell  the  period  of  useful  life  of 
engineering  structures,  such  as  the  radical  de- 
predationists would  base  an  accounting  system 
upon.    The  Court  said  in  part : 

**No  item  of  depreciation,  as  such,  appears 
in  the  tabulation,  though  it  is  probably  in- 
tended to  be  covered  under  the  so-called  *main 
depreciation  reserve.'  This  was  based  not 
upon  any  direct  ascertainment  of  actual  de- 
terioration in  the  bridge  structure,  but  upon 
the  basis  of  the  estimated  future  life  of  the 
bridge.  It  is  difficult  to  characterize  this  by 
any  other  term  than  guess  work.  The  engi- 
neers gave  the  estimate  of  the  probable  dura- 
tion of  such  bridge  from  the  time  of  its  con- 
struction. This  was  followed  up  by  an  esti- 
mated duration  of  the  bridge  in  the  condition 
in  which  it  was  at  the  time  when  the  valuation 
was  made,  and  which,  if  correct,  would  show 
a  far  longer  period  of  durability  than  would 
have  been  anticipated  at  the  time  when  first 
constructed.  This  is  a  factor  which  under  the 
circumstances  of  this  case  is  in  the  highest 
degree  speculative  and  impossible  to  measure 
in  terms  of  dollars  and  cents,  as  the  Commis- 
sion undertook  to  do. 

Then  superadded  to  all  of  the  considera- 
tions thus  far  noted  was  the  following:  ^We 
have  given  consideration  to  the  circumstances 
therein  set  up  and  have  construed  them  as 
creating  substantial  equities  in  the  public 
with  respect  to  the  rates  of  toll  proper  to  be 
charged  over  the  bridge  in  question.'  Just 
what  these  supposed  substantial  equities  were 
the  opinion  of  the  Commission  throws  no 
light  upon,  but  having  them  in  mind,  and  af- 
ter the  deductions  already  mentioned,  an  al- 
lowance, and  apparently  a  substantial  allow- 


95 


ance,  was  made  for  these  equities,  with  the 
result  that  the  value  of  the  bridge  was  de- 
creased $100,000  and  its  value  fixed  at  $250,- 
000,  and  the  tolls  attempted  to  be  adjusted  so 
as  to  yield  to  the  stockholders  of  the  Bridge 
Company  a  proper  return  upon  such  valua- 
tion. 

^^By  a  similar  process  of  reasoning j  it 
would  have  been  entirely  possible  to  have 
reached  any  valuation  which  anight  have  been 
desired.  This  is  not  intended  as  in  any  way 
reflecting  upon  the  bona  fides  of  the  intent  of 
those  constituting  the  Public  Service  Commis- 
sion, either  in  fixing  the  fair  value  of  the 
bridge,  or  the  rates  promulgated  by  the  Com- 
missioner's order  but  it  is  important  as  show- 
ing that  the  method  adopted  and  result  ob- 
tained was  unreasonable. 

*'It  is  not  the  function  of  this  Court  either 
to  fix  the  valuation  of  the  property  or  the  rea- 
sonableness of  the  rates.  Its  sole  power  and 
duty  is  to  examine  those  rates  in  the  light  of 
the  method  by  which  they  were  obtained,  and 
say  whether  in  our  judgment  the  same  were 
reasonable  or  unreasonable,  and,  after  careful 
consideration,  we  are  bound  to  hold  the  ac- 
tion of  the  Commission  unreasonable,  and  the 
decree  appealed  from  must,  therefore,  be  re- 
versed. ' ' 

The  fundamental  proposition  has  been  stated 
with  great  clarity  by  the  Supreme  Court  of  Idaho 
in  Murray  vs.  Public  Utilities  Commission  (150 
Pac,  57;  P.  U.  E.,  1915F,  page  438),  in  reversing 
the  ruling  of  a  majority  of  the  Idaho  Commis- 
sion and  sustaining  the  contentions  made  in  the 
minority  opinion  of  Commissioner  Ramstedt  in 
the  Pocatello  Water  Company  case.  The  Idaho 
Supreme  Court  said  in  part : 


96 


*'So  far  as  the  question  of  depreciation  is 
concerned,  we  think  deduction  should  be  made 
only  for  actual,  tangible  depreciation,  and  not 
for  theoretical  depreciation,  sometimes  called 
*  accrued  depreciation.'  In  other  words,  if  it 
he  demonstrated  that  the  plant  is  in  good 
operating  condition,  and  giving  as  good  ser- 
vice as  a  neiv  plant,  then  the  question  of  de- 
preciation may  he  entirely  disregarded/^ 

To  the  same  effect  see  Sandpoint  vs.  Sandpoint 
W.  d  L.  Co.,  P.  IT.  R.,  1915F,  page  464  (Idaho). 

The  Idaho  Public  Service  Commission  has  sub- 
sequently rejected  the  *^ accrued  depreciation'' 
theory  with  great  positiveness.  The  fair  value  of 
the  property  of  the  Wood  River  Poiver  Company, 
an  electrical  corporation  of  Idaho,  w^as  fixed  by 
the  Commission,  on  January  10,  1921,  at  $312,- 
360.86.  In  arriving  at  this  value,  no  deduction 
was  made  for  accrued  depreciation.  The  Com- 
mission gave  its  reports  for  this  as  follows 
(P.  U.  R.  1921  B,  page  531) : 

**  Depreciation  is  a  general  term  used  to 
cover  all  of  the  factors  affecting  the  physical 
serviceability  of  a  public  utility  property  that 
cannot  and  need  not  be  currently  met,  but 
which  will  ultimately  force  retirement  or  re- 
placement. Service  is  not  a  thing  of  the  mo- 
ment, but  includes  the  future,  and  the  assur- 
ance that  service  will  be  continuous  for  so 
long  as  the  users  demand  and  are  willing  to 
pay  for  it.  The  assurance  of  continuance  of 
service  is  of  even  more  importance  than  is  the 
service  presently  rendered.  Business  and  liv- 
ing plans  are  made  with  regard  to  it.  Com- 
munity and  district  growth  are  affected  by  it, 
and  it  may  be  said  that  service  to-day  is  a 
convenience,  while  the  assurance  of  continu- 


97 


ons  future  service  is  a  necessity.  The  physi- 
cal serviceability  of  a  utility 's  property  means 
both  its  present  ability  to  carry  the  load  and 
its  power  of  continuing  in  service  in  the  fu- 
ture. When  the  property  is  all  physically  new 
its  physical  serviceability  is  at  its  highest 
point,  but  this  new  physical  condition  cannot 
be  maintained.  The  passing  of  time — age; 
the  development  of  new  devices  or  better 
means  of  service — obsolescence;  the  growth 
of  service  needs  in  the  community  or  district 
served — inadequacy — all  of  these  contribute 
to  the  deterioration  of  the  physical  element 
of  the  property  while  in  use.  The  effect  of 
these  cannot  be  met  or  offset  from  day  to 
day  or  year  to  year,  but  in  spite  of  repairs 
and  upkeep  cumulates  to  a  point  where  re- 
tirement or  replacement  is  necessary.  When  a 
public  utility  engages  in  the  business  of  serv- 
ing the  public  it  assumes  a  responsibility  for 
keeping  its  means  of  service  in  such  condi- 
dition  that  the  service  will  not  be  interrupted 
or  impaired.  Its  property  cannot  be  removed 
and  used  elsewhere  so  long  as  it  is  needed  in 
service,  and  it  cannot  be  permitted  to  run 
down  or  get  out  of  repair  to  a  point  where 
service  is  affected.  Because  it  is  not  possible 
to  meet  the  factor  of  depreciation  from  day  to 
day  or  year  to  year,  the  full  serviceability  of 
the  utility's  property  can  be  maintained  only 
when  there  is  a  provision  against  the  time 
w^hen  retirement  or  replacement  must  be 
made.  This  provision  must  necessarily  be 
financial  in  its  nature.  It  must  be  reasonably 
liquid  so  that  its  use,  when  needed,  will  not 
be  unduly  delayed;  it  must  be  reasonably 
adequate  in  amount,  and  it  must  be  fully  pro- 
tected at  all  times.    From  the  nature  of  the 


98 


obligation  which  rests  ujjon  the  utility  this 
provision  is  as  much  a  part  of  the  utihty's 
property  as  any  physical  unit  in  it,  and  when 
present  it  makes  the  immediate  physical  con- 
dition of  the  property  unimportant,  as  what- 
ever may  have  gone  from  the  physical 
through  use  is  represented  in  a  ready  finan- 
cial ability  to  retire  or  replace,  when  neces- 
sary. Serviceability  of  a  going  public  util- 
ity is  part  physical  and  part  financial,  the 
relative  importance  bf  each  factor  being  a 
matter  of  constant  change  under  operation, 
but  the  total  remaining  unchanged/' 

In  Re  Campbell  Bros.  Water  Company  (case 
F-396;  Order  No.  752,  February  25,  1921),  the 
Idaho  Commission  made  no  allowance  for  *^  ac- 
crued depreciation''  of  a  water  company's  prop- 
erty, where  no  '^tangible  depreciation"  was  ob- 
served and  the  property  was  in  every  respect  in 
efficient  *  *  service  condition. ' ' 

The  Wisconsin  Commission  in  its  recent  cases 
has  uniformly  taken  the  position  that  depreciation 
should  not  be  deducted  in  arriving  at  a  rate  base, 
lacking  definite  proof  that  the  depreciation  has 
been  earned  and  that  it  has  been  appropriated  to 
the  investor.  Notable  among  the  decisions  of  this 
commission  are  those  in  the  cases  of  Milwaukee 
Electric  Raihvay  S  Light  Company,  et  al,  vs.  City 
of  Mikvauhee,  P.  U.  R.  1918E,  page  1,  and  Be 
Mineral  Point  Public  Service  Company,  P.  U.  R. 
1919A,  page  795,  which  made  the  following  ruling : 

*^  Rates  or  earnings  should  not  be  based 
merely  on  the  estimated  value  of  the  property 
of  the  utility  after  deduction  of  accrued  de- 
preciation, where  it  does  not  appear  that  past 
earnings  have  been  fully  adequate  to  cover  all 
proper  charges." 


99 


A  similar  position  has  been  taken  by  commis- 
sions in  other  states,  the  New  Jersey  Board  of 
Public  Utility  Commissioners  having  decided,  on 
July  17,  1919,  Re  Medford  Gas  Compmiy,  P.  U  R. 
1919E,  page  707,  that 

^*  Accrued  depreciation  should  not  be  deducted 
from  the  value  of  utility  property  for  rate 
making  where  the  net  earnings  have  not  been 
sufficient  to  provide  for  it  together  with  a  fair 
return. ' ' 

The  Washington  Public  Service  Commission  in 
the  case  of  Public  Service  Commission  of  Wash- 
ington vs.  Kelso  Water  Company,  P.  U.  R.  1919E, 
page  206,  recently  said: 

*^  We  believe  there  is  thought  worthy  of  con- 
sideration in  an  article  entitled  *  Theoretical 
Depreciation,'  by  George  N.  Webster  of  New 
York,  wherein  he  states  :* 

*The  method  of  unsound  valuation 
against  which  this  article  is  directed  may 
be  described  briefly  as  the  **cost  less  depre- 
ciation'' method.  The  *'cost"  may  be 
** original  cost,"  ** average  cost,"  or  ^* pres- 
ent cost."  The  depreciation  which  is  de- 
ducted therefrom,  and  which  may  be  said 
to  have  its  origin  in  the  concept  that  used 
property  is  less  valuable  than  new  prop- 
erty, is  based  upon  the  assumption  that 
used  property  becomes  uniformly  less  valu- 
able during  the  period  of  its  alleged  life 
expectancy,  starting  at  100  per  cent,  value 
and  ultimately  reaching  zero  value.  The 
amount  to  be  deducted  is  computed  by  find- 
ing the  ratio  of  the  expired  life  to  the 
assumed  total  life,  and  by  applying  that 


*See  note  on  page  10,  ante. 


100 


ratio  to  the  **cost;''  the  amount  thus  ob- 
tained, deducted  from  the  **cost/'  is  sup- 
posed  to   represent  the   ^* present  value'' 

*       *       * 

'It  is  not  conceivable  that  anyone  could 
give  the  subject  of  depreciation  of  the  kind 
here  illustrated  serious  consideration  with- 
out discovering  its  utter  fallacy.  That  so 
few  have  raised  their  voices  in  protest 
against  it  must  be  attributed  to  the  fact 
that  few  have  really  considered  it  seriously. 
These,  who  are  unalterably  opposed  to  the 
theory,  include  some  economists,  some 
members  of  the  judiciary,  a  few  of  the  Pub- 
lic Service  Commissions,  some  executives 
of  corporations,  and  some  members  of  the 
legal,  engineering  and  accounting  frater- 
nities. They  have  discovered  that  the 
question  is  not  one  of  engineering,  nor  of 
accounting,  but  one  of  economics  and 
finance  and  the  legal  protection  of  property 
rights.'  " 

In  Re  Arkansas  Light  £  Power  Company  (P.  U. 
E.  1920  D,  page  775),  the  engineer  testifying  be- 
fore the  Arkansas  Commission,  in  behalf  of  the 
municipal  authorities,  had  filed  a  physical  valua- 
tion of  the  company's  electric  light  and  power 
plant,  based  upon  original  cost  where  the  figures 
thereof  were  obtainable  from  inquiry,  and  upon  a 
ten-year  average  of  prices  prior  to  1917,  where 
original  cost  data  was  not  available.  The  engi- 
neer then  arrived  at  a  '* depreciated  value"  by  as- 
suming a  50-year  life  for  the  plant,  and  a  17-year 
depreciation  thereof,  at  two  per  cent,  a  year,  on  a 
* '  straight-line ' '  basis.  Quoting  with  approval  the 
decision  of  the  Washington  Public  Service  Com- 
mission in  the  Kelso  Water  Company  case  (see 
page  99,  ante)  and  its  excerpt  from  the  Webster 


monograph,  the  Commissit)n''t?ont3iiid*ed:"  *^This 
method  of  valuation  cannot  be  accepted  by  the  Ar- 
kansas Corporation  Commission,"  adding,  signifi- 
cantly: ^*An  unwise  administration  of  regulatory 
law  will  drive  capital  from  this  field  and  bring  on 
public  calamity  by  causing  the  utilities  to  cease  to 
function." 

In  Re  Gardiner  Electric  Light  S  Water  Com- 
pany (P.  U.  R.  1920  D,  page  821),  the  Montana 
Public  Service  Commission  refused  to  make  any 
deduction  from  a  valuation  based  on  actual  invest- 
ment, where  no  reserve  had  been  created  out  of 
earnings  and  the  earnings  had  been  inadequate. 
The  Commission  intimated  that  a  deduction  for 
*  depreciation "  would  be  made  only  if  the  com- 
pany sought  to  claim  a  return  based  on  **  appre- 
ciation," in  the  form  of  the  present  reproduction 
cost  of  its  property. 

Summary  of  Conclusions  from  Foregoing  Decisions 

^  The  conclusions  to  be  drawn  from  the  foregoing 
decisions  may  be  summarized  and  paraphrased  as 
follows : 

If  a  utility's  patrons  have  received  its  ser- 
vice at  a  fair  price  based  upon  actual  cost  in- 
cluding a  fair  return  07i  its  investment,  and 
not  at  a  price  inflated  by  the  arbitrary  in- 
clusion therein  of  a  provision  for  theoretical 
depreciation,  no  deduction  for  depreciation 
should  be  made  from  the  value  of  its  prop- 
erty. If  on  the  other  hand,  it  has  been  so 
misguided  as  to  accrue  ** reserves"  on  the 
** theoretical  depreciation"  basis  and  has 
exacted  from  its  patrons  an  additional  charge 
therefor,  the  amount  thus  exacted  is  com- 
monly deducted  from  the  value  of  its  prop- 
erty. K 


-.  102 

Basic 'Objections  to  the  "Accrued  Depreciation" 
Theory 

It  is  of  course  true  that  the  practice  of  requir- 
ing reserves  for  **  accrued  theoretical  depreci- 
ation" based  on  ^Hables-  of  estimated  lives"  of 
railroad  and  public  utility  property,  has  found  a 
measure  of  adherence  on  the  part  of  some  public 
officials  charged  with  regulatory  duties  and  also, 
in  some  instances,  on  the  part  of  executives  of 
raihvay  and  public  utility  enterprises.  Partic- 
ularly at  times  when  public  sentiment  was  adverse 
to  allowing  enterprises  of  this  character  to  earn 
a  rate  of  return  really  adequate,  and  the  obtain- 
ing of  money  for  new  construction  has  in  conse- 
quence been  difficult,  regulatory  officials  have  pre- 
ferred to  permit  utilities  to  fix  their  rates  on  a 
basis  of  accruing  large  *^ reserves"  for  so-called 
'^ depreciation"  and  allowing  perhaps  a  very  mea- 
ger return  on  the  property,  over  and  above  the 
amount  of  such  reserves.  Utilit}^  managers  have 
short- sight edly  been  willing  to  avail  themselves 
of  this  method  of  securing  from  their  patrons  a 
fund  which  can  be  invested  in  new  construction, 
especially  where  the  net  effect  is  to  allow  the 
utility  to  exact  from  its  patrons,  over  and  above 
actual  operating  charges  (including  the  actual 
cost  of  repairs  and  the  retirement  of  property) 
a  much  more  liberal  sum  than  the  regulatory 
officials  would  feel  it  politically  prudent  to  allow 
in  any  other  guise. 

Taking  advantage  of  this  short-sighted  view  on 
the  part  of  these  utility  managers,  propagandists 
of  radical  views,  who  are  often  found  in  the  staffs 
of  regulatory  commissions  and  sometimes  in  their 
membership,  urge  and  advocate  the  accrual  of 
still  larger  ** reserves"  on  this  hypothetical  basis. 
They  know  that,  in  addition  to  giving  them  a  pre- 
text for  keeping  the  rate  of  return  down  to  a 


103 


point  deemed  politically  prudent,  it  also  gives 
them  a  basis,  sooner  or  later,  for  asserting  two 
contentions  that  accord  fully  with  their  radical 
tenets : 

(1)  That  the  railway  or  utility  having 
accrued  a  large  ^* reserve''  for  ** depreci- 
ation'' on  the  theory  that  a  corresponding 
part  of  the  ** useful  life"  of  its  property 
has  ** expired"  and  been  reduced  by  the 
flight  of  time,  and  the  amount  of  such 
*^ depreciation"  in  ^^ value"  having  been 
collected,  year  by  year,  from  the  rate- 
payers, the  company  cannot  be  heard  to 
claim  that  its  property  has  not  *' depreci- 
ated" in  *^ present  value"  to  that  extent, 
and  the  amount  of  such  *  *  reserve, ' '  invested 
usually  in  existing  property  of  the  railway 
or  utility,  must  be  deducted  from  the  aggre- 
gate amount  on  which  the  company  would 
otherwise  be  entitled  to  have  a  fair  return 
computed. 

(2)  For  similar  reasons,  whenever  these 
radical  propagandists  feel  that  public  opin- 
ion is  favorable  to  their  peculiar  views,  they 
loudly  advocate  governmental  acquisition 
and  operation  of  the  property,  claiming 
that  the  government  can  secure  the  same 
more  cheaply  because  the  rate-payers  have 
been  contributing  annually  to  a  piecemeal 
purchase  of  the  property,  through  the  cre- 
ation of  a  ^*  reserve"  that  has  been  collected 
from  them,  over  and  above  operating  ex- 
penses and  a  fair  return. 

Thus  the  utility  and  railway  managers  who 
countenance  the  *' accrued  theoretical  depreci- 
ation" concept,  and  the  regulatory  officials  who 
acquiesce  in  its  adoption,  are  lending  themselves 


104 


to  the  confiscation  of  property  and  the  overthrow 
of  regulation.  We  submit,  on  the  basis  of  the  gen- 
eral American  experience: 

(1)  That  the  setting  up  of  *  ^  depreciation 
reserves''  based  on  ''life  tables"  leads  inev- 
itably to  an  unjust  and  burdensome  inflation 
of  the  rate  charged  to  patrons  and  to  the 
accrual  of  reserves  vastly  greater  than  are 
actually  necessary  to  make  provision  for  the 
retirements  of  property  as  and  when  they 
occur. 

(2)  That  when  reserves  are  set  up  and 
accrued  on  this  basis,  the  amount  of  such 
reserves  constitutes  the  minimum  amount 
which  is  sooner  or  later  deducted  from  the 
smn  on  Avhich  the  company  would  otherwise 
have  its  fair  return  calculated,  and  would  in 
any  event  be  deducted  from  the  sum  which 
the  government  would  pay  for  the  property 
upon  any  acquisition  of  the  same. 

(3)  That  this  deduction  is  made  in  com- 
plete disregard  of  the  fact  that  even  including 
the  net  balance  in  such  reserves  as  a  part  of 
the  sum  earned  by  the  enterprise  over  and 
above  actual  operating  charges,  the  aggre- 
gate figures  still  constitute  less  than  the  fair 
return  which  the  enterprise  was  constitution- 
ally entitled  to  earn  upon  the  fair  value  of 
its  property. 

(4)  That  where  the  matter  of  retirement 
expense  is  treated  in  a  sound  way,  on  the 
basis  of  actual  outlays  therefor,  charged 
against  operating  expenses,  none  of  these 
confiscatory  consequences  rise  up  to  plague 
the  enterprise  and  deprive  its  investors  of 
their  constitutional  rights. 


105 


The  Brooklyn  Borough  Gas  Company  Case  and  Other 
Recent  New  York  Rulings 

The  foregoing  views  may  be  fortified  by  the 
examination  of  other  judicial  decisions,  in  addi- 
tion to  those  already  quoted  from.  The  decision 
of  Ex-Justice  Charles  E.  Hughes,  as  Keferee  in 
Brooklyn  Borough  Gas  Company  vs.  Public  Serv- 
ice Commission  for  the  First  District  (17  State 
Dept.  Rep.,  81,  103,  104),  is  sometimes  cited  as  a 
claimed  precedent  for  a  deduction  of  **  accrued 
depreciation"  from  the  reproduction  cost  of  prop- 
erty. In  that  case,  the  distinguished  Referee 
simply  deducted  from  the  reproduction  cost  of 
the  property,  as  found  by  the  Public  Service  Com- 
mission and  as  entered  by  the  Company  in  its 
fixed  capital  account  as  the  book  cost  of  its  prop- 
erty, the  amount  which  the  company  itself  carried 
in  the  general  reserve  account  entitled  **  Accrued 
Amortization  of  Capital,''  representing  the  ** total 
extent  of  accrued  depreciation  according  to  the 
plaintiff's  estimate.'' 

The  Referee  observed  that: 

**  There  is  no  evidence  ivhatever  to  impugn 
the  correctness  of  this  estimate  of  the  accrued 
depreciation  or  of  the  propriety  of  the  annual 
additions  to  the  depreciation  reserve,  or  the 
correctness  of  the  total  estimate  of  accrued 
depreciation  by  the  account  known  as  ^ac- 
crued amortization  of  capital'  as  it  stood  on 
December  31,  1917." 

The  Referee  stated  the  basis  of  his  action  to  be 
that: 

**  There  is  simply  deducted  the  amount  of 
its  own  estimate  of  the  accrued  depreciation 
in  its  plant  (17  State  Dept.  Rep.,  81,  103)." 


106 


The  New  York  Public  Service  Commission  for 
the  Second  District,  while  following  Judge 
Hughes'  view  that  the  reserve  must  be  deducted 
where  the  company  has  itself  created  such  a  re- 
serve, ruled  recently  that  ivJien  no  ''  depreciation 
reserve' '  has  been  created  by  the  company,  no 
deduction  for  depreciation  should  be  made  from 
fixed  capital.  If  the  company  has  itself  created 
and  carries  on  its  books  such  a  reserve,  the  Com- 
mission held  that  the  amount  thereof  is  of  neces^ 
sity  deducted  by  the  State  regulatory  body  in 
arriving  at  the  quantum  of  property  investment 
upon  which  the  company  is  entitled  to  earn  a 
return.  In  Complaint  against  Binghamton  Light, 
Heat  S  Power  Company  (24  State  Department 
Eeports,  651,  at  page  655),  the  Public  Service 
Commission  for  the  Second  District,  in  a  unan- 
imous opinion  by  Commissioner  Irvine,  held: 

**The  company  has  failed  to  set  aside  as  a 
depreciation  reserve  as  much  as  was  recom- 
mended by  the  Commission  in  a  capitaliza- 
tion case  in  1916.  Its  books  now  show  a 
reserve  of  $170,830.67.  The  books  indicate 
that  this  has  all  been  reinvested  in  plant  and 
should,  therefore,  be  deducted  from  fixed 
capital  in  obtaining  a  rate  base.  It  is  claimed 
that  the  deduction  should  be  on  the  basis 
recommended.  While  the  Court  of  Appeals 
has,  in  a  case  relating  to  this  very  company, 
emphatically  declared  the  necessity  of  such 
a  reserve  (People  ex  rel.  B,  L.  H.  &  P.  Co. 
vs.  Stevens,  203  N.  Y.,  7),  it  has  also  declared 
that  the  Commission  is  without  power  to 
impose  upon  a  corporation  any  specific  re- 
quirement therefor  (People  ex  rel.  N.  Y.  R. 
Co.  vs.  P.  S.  C,  223  N.  Y.,  373).  As  the  Com- 
mission may  not  directly  impose  such  a  re- 
quirement it  would  seem  that  it  may  not  indi- 


107 


rectly  do  so  by  charging  arbitrarily  against 
the  fixed  capital  a  non-existent  reserve  suf- 
ficient to  meet  its  ideas  of  what  should  prop- 
erly have  been  set  up.  Nothing  has  been 
taken  from  the  public  on  this  account  beyond 
the  amount  actually  set  up  and  there  has  been 
no  obsolescence  or  retirement  decreasing  the 
efficiency  of  the  plant  or  not  reflected  in  cred- 
its to  fixed  capital/' 

See,  also,  Hoffman  vs.  Elmira  Water,  Light  & 
Railroad  Company  (N.  Y.  Pub.  Serv.  Comn,  2nd 
Dist.;  January  22,  1920;  P.  U.  K.  1920  D,  page 
266 ;  Ibid,  P.  U.  R.  1921C,  page  409) ;  Re  New 
York  State  Railways  (N.  Y.  Pub.  Serv.  Comn,  2nd 
Dist ;  P.  U.  R.  1921C,  page  496).  In  both  the  cases 
last  cited,  the  Commission  refused  to  deduct  **  ac- 
crued depreciation ''  from  the  ** original  cost''  of 
the  utility  property,  but  based  such  action,  at 
least  in  part,  on  a  finding  that  the  **  present 
value"  of  the  property  was  at  least  the  investment 
therein,  without  deduction. 

In  Conclusion 

The  adoption  of  theoretical  depreciation  as  the 
basis  of  the  provision  to  be  made  by  common  car- 
riers for  the  ** depreciation"  referred  to  in  the 
Act,  finds  no  justification  in  sound  principles  of 
economics  or  finance.  Its  adoption  would  be  con- 
trary to  public  policy  and  would  do  more  to  de- 
stroy public  confidence  in  railroad  securities  than 
any  other  suggestion  that  has  come  from  the  camp 
of  those  at  heart  opposed  to  private  ownership 
and  operation  under  adequate  public  regulation. 
If  enforceable,  it  would  wickedly  burden  railroad 
rates  with  a  fictitious  expense  when  they  are 
already  overburdened  with  legitimate  operating 
expenses  compelling  rates  so  high  as  to  menace 


108 


the  industries  and  commerce  of  the  country.  It 
would  in  effect,  be  to  play  into  the  hands  of  Fed- 
eral ownership  fanatics  at  a  time  when  the  people 
have  unqualifiedly  placed  their  disapproval  on 
governmental  ownership  and  have  retired  its 
strongest  advocates  from  office.  We  protest, 
therefore,  that  the  Interstate  Commerce  Commis- 
sion would  have  no  right  or  reason  to  put  the  seal 
of  its  apparent  approval  upon  a  theory,  which, 
if  carried  to  its  logical  conclusion,  would  result 
in  the  virtual  confiscation  of  billions  of  dollars 
invested  in  railroad  property,  this  being  the  real 
aim  and  purpose  of  the  proponents  of  this  theory. 
Nor  would  the  Commission  be  warranted  in  adopt- 
ing a  theory  against  which  virtually  every  Court, 
regulatory  commissioner,  economist  and  financier, 
who  has  given  it  careful  and  thorough  consider- 
ation, has  ruled  unqualifiedly,  and  which  the 
Commission  may  not  legally  enforce  after  it  has 
adopted  it.  We  protest  against  any  action  by 
this  Commission  giving  to  this  obsolete  and  dis- 
credited theory  any  manner  of  support. 

When  the  question  of  the  form  and  substance 
of  the  regulations  to  be  prescribed  under  Section 
20  reaches  the  stage  of  discussion  and  hearing  by 
and  before  the  Commission,  we  shall  be  glad  to 
be  advised  of  any  opportunity  to  participate  in 
such  a  discussion,  to  the  end  that  no  fictitious 
inclusions  in  the  operating  expenses  of  carriers 
may  be  permitted  to  augment  avoidably  the  trans- 
portation costs  which  our  companies  must  in 
turn  pass  on  to  their  many  consumers. 


Eespectfully  submitted. 


KOBEKT  A.  CAHTER, 
WILLIAM  L.  RANSOM. 


table:  of  cases 

PAGE 

Ames  vs.  Union  Pac.  R.  R.  Co.  (C.  C.) 

(64  Fed.  178,  179)  65 

Ben  Avon  Borough  vs.  Ohio  Valley  Water 
Co.  (P.  U.  R.  1918  A,  page  161;  see, 
also,  253  U.  S.  287) 72 

Bonbright  vs.  Geary  (210  Fed.  44) 67 

Brooklyn  Borongh  Gas  Co.  vs.  Pub.  Serv. 
Comn.  1st  Dist.  (17  N.  Y.  St.  Dept. 
Repts.,  page  81) 105 

Consolidated  Gas  Co.  vs.  Newton  et  al. 

(267  Fed.  231)   32-36,  55,  80 

Consolidated   Gas   Co.   vs.   City  of  New 

York  (157  Fed.  849)  63 

Contra  Costa  "Water  Co.  vs.  City  of  Oak- 
land (113  Pac.  668)  70 

Cotting   vs.    Kansas    City    Stock   Yards 

(C.  C.)  (82  Fed.  854)  ...' 64 

Cumberland  Telephone  &  Teleg.  Co.  vs. 
City  of  Louisville  (157  Fed.  637,  650; 
212  IT.  S.  414)   69 

Ex  Parte  74  (Before  Interst.  Com.  Comn.)     23,  24 

Havre  de  Grace  &  P.  Bridge  Co.  vs.  Tow- 
ers (103  Atl.  319;  P.  U.  R.  1918  D, 
page  484) 93 

Hoffman  vs.  Elmira  Water,  Light  &  R.  R. 
Co.  (P.  U.  R.,  1920  D,  page  266;  P.  U. 
R.  1921  C,  page  409 ;  N.  Y.,  2nd  Dist.)         107 

Kansas  City  Southern  Ry.  Co.  vs.  U.  S. 

231  U.  S.  423) 13, 17,  51, 56,  57, 92,  93 

Knoxville  Water  Co.  vs.  Knoxville  (212 

U.  S.  1) 34, 45, 47, 48-55, 56,  57,  67,  68, 69 


II 


PAGE 

Lincoln  Gas  Co.  vs.  Lincoln   (223  U.  S. 

349)  48 

Milwaukee  -El.  Ey.  &  L.  Co.  vs.  Milwaukee 

(P.  U.  E.  1918  E,  page  1 ;  Wise.) ....  98 

Minnesota  Eate  Case  (230  U.  S.  352) ....     34,  46 

Murray  vs.  Public  Utilities  Comn.    (150 

Pac.  57 ;  P.  U.  E.  1915  F,  page  436) . .  95 

Nashville  C.  &  St.  L.  Ey.  Co.  vs.  U.  S. 

(269  Fed.  351)    36-43 

New  York  &  Queens  Gas  Co.  vs.  Newton 

et  al.  (269  Fed.  277)   26-32,  52, 80 

Pacific  Gas  &  Electric  Co.  vs.  San  Fran- 
cisco (U.  S.  Dist.  Ct.;  No.  Dist.  of 
Cal.)   26,71 

Pioneer  Telephone  &  Telegraph  Co.  vs. 

Westenhaver  (290  Okla.  420) 71 

Pioneer  Telephone  &  Telegraph  Co.  vs. 

State  of  Oklahoma  (167  Pac.  995) ....  71 

Public  Service  Comn.  of  Washington  vs. 
Kelso  Water  Co.  (P.  U.  E.  1919  E, 
page  206)   99,100 

Ee  Arkansas  Light  &  Power  Co.  (P.  U.  E. 

1920  D,  page  775;  Ark.) 100 

Ee  Binghamton  Light,  Heat  &  Power  Co. 

(24  N.  Y.  St.  Dept.  Eepts.,  page  651)        106 

Ee  Campbell  Bros.  Water  Co.  (Idaho  P. 

S.  Comn. ;  February  25,  1921) 98 

Ee  Gardiner  Electric  Lt.  &  Water  Co.  (P. 

U.  E.  1920  D,  page  821 ;  Mont.) 101 

Ee  Increased  Freight  Eates  (58  I.  C.  C. 

220) 43 


Ill 


PAGE 

Ee  Medford  Gas  Co.   (P.  U.  R.  1919  E, 

page  707;  N.  J.)   99 

Ee    Mineral    Point    Public    Service    Co. 

(P.  U.  E.  1919  A,  page  795 ;  Wise.) ...  98 

Ee  New  York  State  Eailways  (P.  U.  E. 

1921  C,  page  496;  N.  Y.,  2nd  Dist.) . .         107 

Ee  Pocatello  Water  Co.  (P.  U.  E.  1915  F, 

page  436 ;  Idaho)    95 

Ee  Wood  Eiver  Power  Co.  (P.  U.  E.  1921, 

page  531 ;  Idaho)  96 

San  Diego  Land  Co.  vs.  Jasper  (C.  C.) 

(110  Fed.  714)  64 

San  Diego  Land   Co.  vs.  National   City 

(174  U.  S.  757)  64 

Sandpoint   vs.    Sandpoint   W.   &  L.    Co. 

(P.  U.  E.  1915  F,  page  4B4;  Idaho) . .  *        96 

Smyth  vs.  Ames  (169  U.  S.  546) 64 

Spring  Valley  Water  Co.  vs.  San  Fran- 
cisco (252  Fed.  979)    70 

Stanislaus  Co.  vs.  San  Joaqnin  Co.  (192 

U.  S.  201)   64 

Willcox  vs.   Consolidated   Gas   Co.    (157 

Fed.  849;  212  U.  S.  19) 58-67 


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